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CAPITAL 



AND 



POPULATIO:^: 



A STUDY 

OF THE 

ECOIOMIC EFFECTS OF THEIR RELATIONS 
TO EACH OTHER. 






BY '^ 

FEEDERICK B. HAWLEY. 



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NEW YOKK: 
D. APPLETON AND COMPANY, 

1, 3, AND 5 BOND STEEET. 

1882, 



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COPTEIGHT BY 

D APPLETON AND COMPANY, 

1882. 



PREFACE. 



My position as an economist, as exemplified in this 
treatise, is a peculiar one. "While classing myself, I 
believe justly, as a strict disciple of what is usually 
called the English or orthodox school, I have arrived 
at results, in many instances, diametrically opposed to 
theirs ; especially on the subjects of free trade and 
taxation. On the other hand, my reasoning presup- 
poses the falsity of most of the arguments heretofore 
advanced in support of the very conclusions I uphold. 
As I antagonize the results of one side and the meth- 
ods of the other, I can look for friends in neither 
camp, l^evertheless, as the principle I have enunci- 
ated really effects the reconciliation of two lines of 
thought, apparently hopelessly divergent, I may, per- 
haps, expect to be sustained by those of both sides who 
prefer construction to destruction. 

It would be false modesty in me to seem unaware 
that the economic law I have attempted to establish 
equals in its influence upon economic conclusions any 
hitherto ascertained. Granted its truth, it throws new 



iv PPwEFACE, 

and decisive light on nearly all the unsolved problems 
of the science. That it is true, I venture to be the 
more confident of, because I find it conceded bj both 
Mill and Eicardo, although thej failed to apply it, or at 
all recognize its importance. What I have here at- 
tempted is to reason on their lines beyond the limit 
where they stopped, with the result of greatly modify- 
ing and sometimes subverting their conclusions. This 
I have done without in any case impugning their pre- 
mises, or controverting their reasoning, further than to 
show that, while otherwise valid, it was incomplete. My 
anxiety to place myself in accord with, rather than in 
antagonism to, these great thinkers has been so great 
as to lead me to injure the literary form of my work 
by making it substantially a critique upon Mill's "Prin- 
ciples " instead of an independent and consecutive argu- 
ment. This has necessitated long quotations, already so 
familiar to students as to lack interest for them. The 
importance of showing that my ideas are really but the 
further development of those of the orthodox school 
must be my excuse for this ; and I shall be pardoned if 
it has enabled me, as I believe it has, to more readily 
place the law I enunciate, and in some degree eluci- 
date, in its proper relation to the established truths of 
the science. 

Feedeeick B. Hawley. 
Few York, February^ 1882. 



CONTEE'TS. 



CHAPTER p^GE 

L~-Capital ...... 5 

II. — Inceease of Capital . . . . 13 

HI. — The Tendency of Capital to outstrip Population 51 

IV. — Fixed Capital . . . , . 64 

V. — Panics ...... 77 

YI. — Ceedit ...... 97 

VII. — Wages and Peofits . . . . 113 

VIII. — Capital and Laboe . . . .180 

IX. — Co-opeeation . . . . .139 

X. — Feee Teade and Peotection . . . 144 

XI. — The Equation" of Inteenational Demand . 175 

XII. — Disteibution of Wealth in a Peotected Nation 204 

XIII.— Kent . . . . . . .210 

XIV. — Commeece . . . . . 214 

XV. — Ultimate Effects of Feee Teade and Peotection 224 
XVI.— Taxation ...... 235 

XVII. — Some othee Effects of the Law . . 251 

XVIII.— Conclusion ...... 262 



CAPITAL AND POPULATION. 



CHAPTEE I. 

CAPITAL. 

John Stuaet Mill, in his "Principles of Political 
Economy," in defining capital, says : 

" The distinction, then, between capital and not-capital, does not 
lie in the kind of commodities, but in the mind of the capitalist — in 
his will to employ them for one purpose rather than another ; and 
all property, however ill adapted in itself for the use of laborers, is 
a part of capital, so soon as it, or the value to be received from it, is 
set apart for productive reinvestment. The sum of all the values so 
destined by their respective possessors, composes the capital of the 
country. Whether all those values are in a shape directly apjjli- 
cable to productive uses, maTces no difference. Their shape, whatever 
it may de, is a temporary accident ; hut, once destined for produc- 
tion, they do not fail to find a way of transforming themselves into 
things capable of being applied to it.''^ — (Mill, Book I, chapter iv, sec- 
tion 1.) 

In Picardo's works, chapter v, " On Wages," page 51, 
I find the following definition : 

" Capital is that part of the wealth of a country which is em- 
ployed in production, and consists of food, clothing, raw materials, 
machinery, etc., necessary to give effect to labor.'''' 



6 CAPITAL AND POPULATION, 

It is evident that these definitions differ radically, es- 
pecially in the passages which I have put in italics. 

Mill includes, in the term, all wealth destined to pro- 
ductive consumption, whether finally so utilized or not. 
Until the mental disposition of the holder is changed, it 
remains capital, and only ceases to be such when its des- 
tination is changed to unproductive consumption. He 
also includes, not only the necessaries and conveniences 
that will, or may, actually be demanded by the laborer as 
wages and for the facilities and tools for production, but 
also the sum of such luxuries as are destined, before be- 
ing consumed, to be exchanged for such necessaries and 
conveniences. 

Ricardo's meaning is not so clear, on account of the 
ambiguity of the words " is employed." He seems, how- 
ever, to intend to confine the term to that part of wealth 
actually in process of consumption by the laborer for his 
sustenance, or actually being used by him, as tools or 
machinery, to facilitate production, and to exclude not 
only all wealth not fitted for consumption or use by la- 
borers, but such part as is fitted, but not at the time so 
employed. If this is his meaning, circulating capital be- 
comes identical with what is commonly called " the wages 
fund," and fixed capital with such part of the machinery, 
tools, etc., as are actually in use. 

It may be, though I do not so understand him, that 
by "is employed" he means, is eventually envployed — 
in which case his definition approaches nearer to that of 
Mill, but is yet far from being identical with it. 

If we attempt to gather his meaning from his writ- 
ings, we shall find that he uses the term, not only in ac- 
cordance with both senses of his own definition, though 
with the first far more often than with the second, but 



CAPITAL. 7 

also with the sense in which Mill has defined it. And 
the same remark will apply to the writings of Mill, who 
likewise uses it, not only in accordance with his own defi- 
nition, but in accordance with both senses of Kicardo be- 
sides. Mill, indeed, seems utterly oblivious of the fact 
that his definition differs at all from that of his predeces- 
sor ; while Ricardo, in passages, exhibits some perception, 
or rather, perhaps, I should say, an indistinct feeling of 
the distinction to which I am drawing attention. Among 
others, I would instance the note to chapter viii, in 
which he says : 

" There can be no greater error than in supposing that capital is 
increased by non-consumption. If the price of labor should rise so 
high that, notwithstanding the increase of capital, no more could 
be employed, I should say that such increase of capital would be 
still unproductively consumed." 

Ricardo, as we shall see elsewhere,* and as this passage 
shows, perceived and acknowledged that an increase of 
capital, in Mill's sense of the term, does not always lead 
to an increase in his, although his arguments constantly 
assume that an increase of wealth does practically result 
in an increase of the wages fund and an increased produc- 
tion. He here perceives the dilemma, and attempts to es- 
cape from it by the assertion that such increase of capital 
is still " unproductively consumed " — i. e., is not capital 
at all. But in no sense is this true. It is not unproduc- 
tively consumed in any way or shape, but eventually, 
though not immediately, productively consumed. He 
can, if he so chooses to use the word, refuse to call it 
capital, but he can not claim that it is unproductively 
consumed, for it is not consumed at all. 

* For a further instance, see chapter on wages and profit. 



8 CAPITAL AND POPULATION. 

I shall assume througliout this treatise that Ricardo 
intends to denote, by capital, only such portion of wealth 
as is actively engaged in production, as it will appear, in 
the course of the argument, that most of his deductions 
only hold good when the word is used in this exceedingly 
restricted sense; and no student of this most exact of 
deductive reasoners can doubt for a moment his intention 
of using the term mainly in accordance with the deduc- 
tions he draws from it. Places can, indeed, be found in 
his writings where he gives to it a broader signification, 
and adopts more or less fully its popular use ; but when 
this occurs, the fault must be attributed rather to the 
application than to the accuracy of his deductions. 

The assertion that both Eicardo and Mill used such a 
fundamental term as capital in various senses, without 
perceiving that they did so, is a bold one for any one to 
make, but it has been forced upon me by a careful, and I 
may say reverential, study of their writings ; and I shall, 
I am sure, be borne out in it by fellow-students when 
their attention is drawn to the subject. This at least is 
patent even at this stage of the inquiry, that they defined • 
the term very differently ; and it will be acknowledged 
by all that, starting thus from conflicting definitions, they 
proceed by the same arguments to identical conclusions. 
This could hardly have been the case if they had really 
differed in their understanding of the nature of capital ; 
and I do not fear to assert that in similar parts of their 
argument they rarely do differ in the sense in which they 
use the term, notwithstanding the radical difference in 
their definition of it. 

Which definition is correct must be our next consid- 
eration ; and there can be no doubt but that the prefer- 
ence must be given to that of Mill. We already have a 



. CAPITAL, 9 

term, viz., the " wages fund," which accurately coincides 
with " circulating capital " as defined by Ricardo ; and a 
supplementary term can only lead to the further confusion 
of an intricate subject, while a term to define active fixed 
capital from idle is not needed. The popular use of the 
word certainly accords with Mill's definition; and the 
scientific sense should certainly agree with the popular, 
in considering as capital all wealth destined to be em- 
ployed productively, and from which an increase is ob- 
tained or hoped for. 

Ricardo's definition differs so much from the popular 
use of the word, that conclusions drawn from it, however 
correct, are sure to be misunderstood and misapplied 
in practice. Really valuable results are with difficulty 
reached, and, when reached, with difficulty appreciated, 
when the words in w^hich they are expressed are ambigu- 
ous. Furthermore, the real object of inquiry is, not how 
production is effected by the increase of the wages fund 
— that is a simple matter ; but by the general increase of 
wealth in all its forms — a much more complicated subject. 

I would myself prefer a definition of the term, when 
scientifically used, broader than that of Mill, but not 
broader than its popular use. Wealth I would define as 
the existent products of labor, whose utility is not yet 
exhausted ; capital, as that portion of wealth from which 
an income or profit is expected in addition to a return 
of the principal. Under this definition national capital 
would be the same as under Mill's, for no wealth not 
productively employed can add to the net income of the 
community, but much wealth not productively employed 
nevertheless produces an income or profit to its possessors. 
All that part of wealth reserved from immediate for pro- 
longed unproductive consumption, such as houses, places 



10 CAPITAL AND P0PULATI0:N". 

of amusement, works of art, etc., tlie use and enjoyment 
of wliicli are a source of income to tlieir possessors, I 
would prefer to regard as capital to them, though not of 
course to the community, because to their possessors they 
are productive. The distinction does not affect this argu- 
ment, and is of no great importance, further than to no- 
tice that such wealth is of no less advantage to the nation 
than that productively engaged, as, although it adds noth- 
ing to the sum of material products, it immediately grati- 
fies desires similar to those ultimately satisfied by material 
products, and on account of which alone material products 
have any utility. 

Using Mill's or my own definition of capital, it will be 
necessary to divide it into two portions, which we will 
call " dead stock " and " active stock " : active stock be- 
ing coincident with that portion of wealth that Ricardo 
defines as capital, according to our first exemplification 
of his meaning — i. e., all wealth that is at the time pro- 
ductively engaged ; and dead stock being that portion 
excluded by him and included by Mill — i. e., all wealth 
destined eventually, but not immediately, to be employed 
in production. 

This distinction is of the first importance, and must 
be constantly borne in mind during any discussion and 
investigation of the laws and nature of capital. Al- 
though distinctly recognized by all economists,* I know 

* Mill, Book I, chapter iv, section 2 : "As whatever of the produce 
of the country is devoted to production is capital, so, conversely, the 
whole of the capital of the country is devoted to production. This sec- 
ond proposition, however, must be taken with some limitations and ex- 
planations. A fund may be seeking for productive employment, and find 
none adapted to the inclinations of its possessor ; it then is capital still, 
but unemployed capital. Or the stock may consist of unsold goods, not 
susceptible of direct application to productive uses, and not, at the mo- 



CAPITAL. 11 

of none who have realized its importance, or who have 
consistently observed it in their arguments. They, one 
and all, assume that the amount of production depends 
upon the amount of capital, whereas it is really depend- 
ent only on the amount of "active stock," as will be 
immediately acknowledged by every one who gives 
the subject a moment's consideration. Ricardo would 
have been an exception to this, criticism, if he had always 
been consistent with his own definition, faulty as it is. 
He identified "active stock" and capital; but, if he had 
fully appreciated the distinction, he could hardly have 
failed to recognize that he was defining a part of capital 
as if it were the whole, and that his deductions were not 
true of the term in its broad sense. More than any other 
economist, his views coincide with mine, and it is mainly 
owing to his failure to perceive this distinction that our 
conclusions differ so radically. 

It is as a pupil of his and of Mill that I write, and I 
wish to be distinctly understood as accepting nearly- all 
the premises and conclusions in both of them not here 
especially controverted, and to draw attention to the fact 
that all of my premises, both so far and yet to be ad- 
vanced, are theirs also with a single exception — the effect 

ment, marketable ; these, until sold, are in the condition of unemployed 
capital. Again, artificial or accidental circumstances may render it neces- 
sary to possess a larger stock in advance — that is, a larger capital before 
entering on production — than is required by the nature of things. Sup- 
pose that the government lays a tax on the production in one of its earlier 
stages, as, for instance, by taxing the material. The manufacturer has to 
advance the tax before commencing the manufacture, and is, therefore, 
under a necessity of having a larger accumulated fund than is required 
for, or is actually employed in, the production which he carries on. He 
must have a larger capital to maintain the same quantity of productive 
labor." 



12 CAPITAL AND POPULATIOISr. 

of a high rate of wages upon population. That mj con- 
clusions are in many points different from theirs, is solely 
due to their neglecting to follow up their own arguments 
to their proper termination. That they did not do so, we 
shall see, later on, was due, not so much to the want of 
logical acumen, as to the fact that there was nothing in 
their surroundings to suggest further pursuit. The eco- 
nomic condition of England apparently verified their 
conclusions, and they were naturally satisfied with such 
verification. I am especially anxious not to be classed in 
the category of those who have attempted to confute, 
without understanding, these great writers, but fear I 
shall not wholly escape, as my conclusions will run 
counter to some firmly-held opinions, and will conflict 
with many interests, both national and individual ; but 
I can do no more than proclaim myself their disciple, 
and disclaim any attempt at refuting the founders of the 
science. All I shall say is built upon them as a founda- 
tion, and all I hope to accomplish is to raise their struc- 
ture one story higher. 



CHAPTEE II. 



INCREASE OF CAPITAL. 



All wealth, and therefore all capital, is the result of 
abstinence. The products of labor may be consumed by 
the producer, or may be exchanged for other products to 
be consumed, or such products, whether made by him or 
acquired, may be reserved for personal consumption ; in 
which cases they are said to be unproductively consumed. 
If, on the other hand, the producer desires to save what 
he has brought into being, he can do so in two ways : by 
employing it as active, or retaining it as dead, stock. He 
can employ it immediately in sustaining himself and oth- 
ers while engaged in further production, if its nature is 
fitted for such use ; or he can, as soon as possible, exchange 
it for such things as are so fitted, and then employ them 
productively ; or, if he so elects, he can reserve his prod- 
uct, or the things for which he has exchanged it, to be 
ultimately but not immediately employed productively 
by himself or others. 

In a barbarous state of society, where each individual 
endeavors to supply all his wants himself, nearly all prod- 
uce destined for productive consumption immediately 
takes the form of " active stock " ; * but, when division of 

* By the terra " active stock " I mean to include not only what is actu- 
ally at the moment being consumed by the laborer, but also such stock as 



14 CAPITAL AND POPULATION, 

labor lias been established, some reservation of products 
must occur, at least sufficient to allow time for exchanges 
to be effected. 

With the exception of the food which farmers reserve 
for the consumption of themselves, their cattle, and those 
of their laborers whose wants they immediately supply, 
very nearly all of the products of civilized labor enter 
first into "dead stock." All products, which the pro- 
ducer can not himself utilize, necessarily do so. 

From this fund of " dead stock " products are distrib- 
uted to the fund for unproductive consumption and to 
that for productive consumption. What goes to the 
former fund, decreases the amount of "dead stock" — 
what goes to the latter, increases it, as the amount of pro- 
duction is always, on the average, greater than that of 
the productive consumption which produces it ; because, 
when this ceases to be the case, the motive to produce is 
taken away. But dead stock may not be distributed at 
once to either fund, but may be reserved, to await contin- 
gencies. ISTow, what is it that determines the proportion 
in which the gross stock will be divided between these 
three funds ? 

Evidently the relative strength of the desires to accu- 
mulate and to enjoy will determine the amount of the 
fund for unproductive consumption, and the rate of profit 
the amount of that for productive consumption ; but the 
rate of profit itself depends upon the amount of dead 
stock. Any increase of dead stock, other things (includ- 
ing gold) remaining the same, lowers its money-value 
without affecting money- wages ; or, if money- wages are 
lowered, its money-value suffers a yet greater deprecia- 

he will require to support him until the product he is engaged upon is com- 
pleted, and which is preserved by him or for him, for that purpose. 



INCEEASE OF CAPITAL. 15 

tion.^ In the supposed circumstances proportional wages 
must rise at the expense of profits. But if an increase of 
dead stock lowers profits, and a decrease of profits dis- 
courages the conversion of dead into active stock, it fol- 
lows that the " wages-fund " will be smallest when dead 
stock is relatively most abundant, and when the rate of 
jpTojportional wages is the highest. We are entitled, then, 
to say that the amount of dead stock that will become 
active depends upon the amount of dead stock itseK, and 
varies inversely with it : 

" When the production of a commodity is the effect of labor and 
expenditure, whether the commodity is susceptible of unlimited 
multiplication or not, there is a minimum value which is the essen- 
tial condition of its being permanently produced. The value at any 
particular time is the result of supply and demand ; and is always 
that which is necessary to create a marTcet for the existing supply. 
But unless that value is sufficient to repay the cost of production^ and 
to afford^ desides, the ordinary expectation of profit^ the commodity 
will not continue to l)e produced. Capitalists will not go on perma- 
nently producing at a loss. They will not even go on producing at 
a profit less than they can live upon. Persons whose capital is al- 
ready embarked, and can not be easily extricated, will persevere for 
a considerable time without profit, and have been known to perse- 
vere even at a loss, in hope of better times. But they will not do so 
indefinitely, or when there is nothing to indicate that times are 
likely to improve. No new capital will be invested in an employ- 

* This is not true, of course, when the increase of dead stock consists 
wholly or largely of money. In such cases prices and profits will rise and 
proportional wages fall, as happens whenever the currency is inflated. But 
in all cases, when the increase of dead stock is due wholly to saving, there 
will be no increase in the amount of money through the operations of ex- 
change until after prices have been depressed by such increase of dead 
stock disturbing the proportion between gold and other commodities. If 
such increase of stock is universal, the world over, the depression of money 
prices will be permanent, until such stock is unproductively consumed or 
the production of gold increased. 



16 CAPITAL AND POPULATION. 

ment, unless there be an expectation, not only of some profit, but of 
a profit as great (regard being had to the degree of eligibility of the 
employment in other respects) as can be hoped for in any other oc- 
cupation at that time and place. When such profit is evidently not 
to be had, if people do not actually withdraw their capital, they at 
least abstain from replacing it when consumed. The cost of pro- 
duction, together with the ordinary profit, may, therefore, be called 
the necessary price or value of all things made by labor and capital. 
Nobody willingly produces in the prospect of loss. Whoever does 
so, does it under a miscalculation, which he corrects as fast as he 
is able." — (Mill, Book III, chapter iii, section 1.) 

"We have supposed in the above argument that " oth- 
er things remained the same." What was included under 
that head was the state of the arts, social customs and 
regulations, the natural fertility of the soil, and the num- 
ber of the population. Improvement in the two former 
conditions, or any increase in the two latter, will of course 
allow of a corresponding increase of dead stock, without 
its being followed by a rise of proportional wages and fall 
in profits ; and such increase will go partly to swell the 
wages-fund or active stock. It is only when the increase 
of capital outstrips the others that a diminution of the 
wages-fund and a rise of wages will occur. Economists 
have, I believe universally, held that such diminution of 
the wages-fund could be but temporary; because the 
stimulus to population of a high rate of wages would, 
before very long, readjust the ratio between capital and 
population. But the real stimulus to population is not a 
high rate of wages in the sense in which wages are com- 
pared with profits, because that surely entails a lessening 
of employment, but a low rate, because then nearly all 
the members of the laboring class are earning something, 
and the average of the necessities and comforts of life 
that laborers, employed and unemployed, receive is then 



INCREASE OF CAPITAL. 17 

greater than when some are receiving high wages and 
many are receiving none at alL In other words, the stim- 
ulus to population is affected not by the rate of propor- 
tional wages, as economists have hithero universally as- 
sumed, but by the proportion between the gross amount 
of the wages-fund and the number ^of those depending 
upon it for subsistence — a very different thing, for such 
proportion is always the least when the rate of propor- 
tional wages is highest. 

The normal ratio between capital and population, 
when disturbed by an Increase of ca23ital, can not there- 
fore be restored by the stimulus to population afforded 
by such increase ; because its tendency is not to stimu- 
late, but to restrain. The proper proportion of dead 
stock can only be restored, in the absence of exceptional 
circumstances, by an increase of unproductive consump- 
tion, which directly decreases the fund, or by converting 
less of it into active stock, which indirectly decreases the 
fund, by preventing further additions to it being made, 
and thus allows the ordinary, or even a less than ordinary, 
unproductive consumption to deplete it. But the former 
of these causes can not, or rather will not, act, because, 
when an excess of dead stock lessens both profits and the 
wages-fund, neither capitalists nor laborers will have as 
large incomes to expend, and they will consequently con- 
sume less unproductively than before, instead of more, 
and will thus retard instead of assist the readjustment. 

An excess of dead stock can only be practically done 
away with by decreasing production, and the only way to 
escape the necessity of so doing is to prevent a growth 
of capital faster than that of population. 

The reader will please notice that I do not here as- 
sert over-production to be an evil, but only that over-ac- 



18 CAPITAL AND POPULATION. 

cumulation leads necessarily to a lessened production, and 
tliat such lessened production is an evil. 

The importance of the preceding paragraphs to the 
argument can hardly be overstated, and I emphasize them 
by thus drawing attention to them, fearing from the 
brevity of my statement that the importance of the prin- 
ciples involved will not be enough considered. They are 
the only necessary premises that I use, for which I am 
unable to find any authority in Mill and Kicardo them- 
selves. Their truth can not be doubted, nor can it be 
gainsaid that, if Mill and Ricardo had taken notice of the 
fact that increase of dead stock decreases active stock, 
and restrains population instead of stimulating it, they 
would have modified their conclusions very nearly, if not 
quite, in accordance with mine. 

I now desire to verify, by quotation and criticism, the 
somewhat bold charge I have made in the preceding chap- 
ter, that both these writers use the fundamental term " cap- 
ital " loosely and inaccurately, and in conflicting senses. 

In Book II, chapter xi, section 3, Mill says : 

" Wages depend, then, on the proportion between the number 
of the laboring population and the capital, or other funds, devoted 
to the purchase of labor ; we will say, for shortness, the capital. If 
wages are higher at one time or place than at another, if the sub- 
sistence and comfort of the class of hired laborers are more ample, 
it is for no other reason than because capital bears a greater propor- 
tion to population. It is not the absolute amount of accumulation 
or of production that is of importance to the laboring class ; it is 
not the amount even of the funds destined for distribution among 
the laborers ; it is the proportion between those funds and the num- 
bers among whom they are shared. The condition of the class can 
be bettered in no other way than by altering that proportion to 
their advantage; and every scheme for their benefit, which does 
not proceed on this as its foundation, is, for all permanent purposes, 
a delusion." 



mCEEASE or CAPITAL. 19 

This passage singularly exemplifies Mill's confusion 
of thought on the subject we are discussing. In his first 
sentence, if he means by wages real wages, they depend 
mainly on the margin of cultivation, and, in so far as 
they are affected by it, do not depend directly but in- 
versely on the amount of capital, as he defines it ; though 
they do depend upon it in Ricardo's sense of the term. 
If by wages he means proportional wages, they depend 
not upon " the number of the laboring population," but 
upon the ratio of the value of the wages-fund to the 
value of the product. In his second sentence he treats 
the two clauses, " if wages are higher at one time or place 
than at another " and " if the subsistence and comfort of 
the class of hired laborers are more ample," as identical 
propositions. If he means by wages the rate of real 
wages — i. e,, the average sum of necessaries and comforts 
each laborer employed or unemployed receives — they are 
identical ; but neither assertion is true, unless he uses capi- 
tal in the sense of Ricardo ; and it is hardly supposable 
that he does so use it, as it is very unlikely that he should 
attach the importance he seems to, to so simple a state- 
ment as that, the amount each laborer receives can be 
found by dividing the wages-fund by the number of la- 
borers, and yet that is all the statement will then include. 
If he means proportional wages, and adheres to his own 
definition of capital, they are not identical, as his propo- 
sition is true as to the first clause and not true as to the 
second. If he uses the term in Ricardo's sense, they are 
likewise not identical, as the second is true and the first 
not. "Whichever way we interpret Mill's meaning, we 
find an inaccuracy or an inconsistency. 

'Now let us compare Mill's account of the possible in- 
crease of capital with that I have ventured to present. 



20 CAPITAL AND POPULATION. 

In Book I, chapter v, section 3, lie says : 

" While, on the one hand, industry is limited by capital, so, on 
the other, every increase of capital gives, or is capable of giving, 
additional employment to industry; and this without assignable 
limit. I do not mean to deny that the capital, or part of it, may be 
so employed as not to support laborers, being fixed in machinery, 
buildings, improvement of land, and the like. In any large increase 
of capital a considerable portion will generally be thus employed, 
and will only co-operate with laborers, not maintain them. What 
I do intend to assert is, that the portion which is destined to their 
maintenance may (supposing no alteration in anything else) be 
indefinitely increased, without creating an impossibility of finding 
them employment ; in other words, that if there are human beings 
capable of work, and food to feed them, they may always be em- 
ployed in producing something. This proposition requires to be 
somewhat dwelt upon, being one of those which it is exceedingly 
easy to assent to when presented in general termS; but somewhat 
difficult to keep fast hold of in the crowd and confusion of the 
actual facts of society. It is also very much opposed to common 
doctrines. There is not an opinion more general among mankind 
than this, that the unproductive expenditure of the rich is neces- 
sary to the employment of the poor. Before Adam Smith, the doc- 
trine had hardly been questioned ; and ever since his time, authors 
of the highest name and of great merit * have contended that if 
consumers were to save and convert into capital more than a limited 
portion of their income, and were not to devote to unproductive 
consumption an amount of means bearing a certain ratio to the capi- 
tal of the country, the extra accumulation would be merely so much 
waste, since there would be no market for the commodities which 
the capital so created would produce. I conceive this to be one of 
the many errors arising in political economy, from the practice of 
not beginning with the examination of simple cases, but rushing at 
once into the complexity of concrete phenomena. Every one can 
see that if a benevolent government possessed all the food, and all 
the implements and materials, of the community, it could exact pro- 
ductive labor from all capable of it, to whom it allowed a share in 
the food, and could be in no danger of wanting a field for the em- 

* For example, Mr, Malthus, Dr. Chalmers, M. de Sismondi. 



INCREASE OF CAPITAL. 21 

ployment of this productive labor, since as long as there was a sin- 
gle want unsaturated (which material objects could supply) of any 
one individual, the labor of the community could be turned to the 
production of something capable of satisfying that want. Now, the 
individual possessors of capital, when they add to it by fresh accu- 
mulations, are doing precisely the same thing which we suppose to 
be done by a benevolent government. As it is allowable to put any 
case by way of hypothesis, let us imagine the most extreme case 
conceivable. Suppose that every capitalist came to be of opinion 
that, not being more meritorious than a well-conducted laborer, he 
ought not to fare better ; and accordingly laid by, from conscien- 
tious motives, the surplus of his profits; or suppose this abstinence 
not spontaneous, but imposed by law or opinion upon all capitalists, 
and upon land-owners likewise. Unproductive expenditure is now 
reduced to its lowest limit ; and it is asked. How is the increased 
capital to find employment ? Who is to buy the goods which it will 
produce? There are no longer customers even for those which 
were produced before. The goods, therefore (it is said), will remain 
unsold; they will perish in the warehouses, until capital is brought 
down to what it was originally, or rather to as much less, as the 
demand of the consumers has lessened. But this is seeing only one 
half of the matter. In the case supposed, there would no longer be 
any demand for luxuries, on the part of capitalists and land-owners. 
But when these classes turn their income into capital, they do not 
thereby annihilate their power of consumption ; they do but trans- 
fer it from themselves to the laborers to whom they give employ- 
ment. Now, there are two possible suppositions in regard to the 
laborers ; either there is, or there is not, an increase of their num- 
bers, proportional to the increase of capital. If tliere is, the case 
offers no difficulty. The production of necessaries for the new 
population takes the place of the production of luxuries for a por- 
tion of the old, and supplies exactly the amount of employment 
which has been lost. But suppose that there is no increase of popu- 
lation. The whole of what was previously expended in luxuries, by 
capitalists and landlords, is distributed among the existing laborers, 
in the form of additional wages. We will assume them to be al- 
ready sufliciently supplied with necessaries. What follows ? That 
the laborers become consumers of luxuries, and the capital previ- 
ously employed in the production of luxuries is still able to employ 



22 CAPITAL AND POPULATION. 

itself in the same manner; the difference being, that the luxuries 
are shared among the community generally, instead of being con- 
fined to a few. The increased accumulation and increased produc- 
tion might, rigorously speaking, continue, until every laborer had 
every indulgence of wealth, consistent with continuing to work; 
supposing that the power of their labor were physically sufficient to 
produce all this amount of indulgences for their whole number. 
Thus the limit of wealth is never deficiency of consumers, but of 
producers and productive power. Every addition to capital gives 
to labor either additional employment, or additional remuneration ; 
enriches either the country or the laboring class. If it finds addi- 
tional hands to set to work, it increases the aggregate produce; if 
only the same hands, it gives them a larger share of it ; and perhaps 
even in this case, by stimulating them to greater exertions, aug- 
ments the produce itself." 

Even if we assent to every subsequent proposition in 
this quotation, the assertion in the first sentence, that 
" every increase of capital gives or is capable of giving 
additional emj^loyment to industry, and this without as- 
signable limit," is not true. If we suppose population to 
keep pace with or increase faster than capital, the time 
must eventually arrive when every capitalist and laborer 
is reduced to the barest necessities ; and then a further 
increase of capital can not lead to any increase in popula- 
tion or production. Such further increase, which must 
come entirely from rentals, would then surely fail to give 
"additional employment or remuneration to industry." 
If population did not increase as fast as capital, the time 
would eventually arrive when all the population in 
existence, willing to work for all they produced, would 
be employed in the most advantageous manner that the 
state of the arts would allow. An increase of capital, 
then, coming from rent or wages (it could not come from 
profits, as they would be annihilated), could give no 



INCREASE OF CAPITAL. 23 

additional employment, for there would be no more 
laborers to be set to work. There are then " assignable 
limits" to ca23ital5 even under the wildest and most 
improbable suppositions. 

But, passing this, if we hold Mill to his definition, the 
whole reasoning is unsound, for the infinite increase of 
capital he supposes might go to the increase of dead and 
not of active stock, as indeed it would, capitalists being 
human ; in which case no more labor would be employed 
than before it took place. If, on the other hand, by capi- 
tal he means the wages-fund, his argument is true enough, 
but more curious than valuable. Indeed, I fail to see how 
it can in any sense be called political economy. I have 
always conceived that science to be an inquiry into the 
acquisition and distribution of wealth, not by disinterest- 
edly benevolent beings, but by self-interested men. That 
men will act in accordance with their real or supposed in- 
terest, is the major premise of all economic reasoning. I 
do not know to what science to refer an argument based 
on the supposition that any class of men will not do so, 
but I am quite certain that such science is not economic. 
This whole quotation is an attempt to show what would, 
or could, occur if capitalists were content to go on pro- 
ducing with no hope of a gain. Is there a single eco- 
nomic doctrine that can stand such a test ? What would 
become of Malthus's theory of population, if laborers 
would work without wages 1 What of Eicardo's theory 
of rent, if landlords and tenants were indifferent to the 
rentals paid and received ? "What of the proposition that 
profits tended to equalization, if capitalists were careless 
of what profit they obtained ? And yet we are asked to 
believe that over-accumulation is impossible, because it 
would be so if capitalists were indifferent to profit, and 
2 



24 CAPITAL AND POPULATION. 

we are scouted as ignorant visionaries if we venture to 
suggest tliat it may be the cause of our periods of indus- 
trial stagnation. Mill says : 

"Authors, of the highest name and of great merit, have con- 
tended that if consumers were to save and convert into capital more 
than a limited portion of their income, and were not to devote to 
unproductive consumption an amount of means bearing a certain 
ratio to the capital of the country, the extra accumulation would be 
merely so much waste, since there would be no market for the com- 
modities which the capital, so created, would produce." 

If he merely means to assert, following Say, that the 
supply of commodities constitutes the demand, what he 
says is true, but is inapplicable to the discussion. The word 
" market," as used by his opponents, implies very much 
more than he seems to suppose, and the sense in which 
they use the word is its proper signification, both popu- 
larly and scientifically. When men speak of a good or 
bad market, they do not mean a market in which more 
goods can be bought than can be sold, or vice versa, but 
they mean a market in which, at the going prices, goods 
can be exchanged for such amount of money or other 
things as will, w^hen expended in production, more than 
reproduce or less than reproduce the original things. If 
the goods will buy more labor than it took to produce 
them, the market is good ; if less, the market is poor. 
Now insert before the word " market" the word ^'remu- 
nerative," and, tautological though it be, the addition 
makes it evident that Mill's opponents have given a true 
and valid reason for all their assertions. 

I do not remember to have anywhere seen the obser- 
vation that Say's principle, applied as Mill applies it, 
proves as well that no single commodity can be in excess, 
as that material commodities generally can not be so. l^o 



INCREASE OF CAPITAL. 25 

matter what the quantity of a single commodity, it wonld 
exchange for something ; and we can not say of it that 
more has been produced than can he exchanged, and like- 
wise we can not say this of commodities generally, but 
we can say both of single commodities and material com- 
modities in general, that more has been produced than 
will he exchanged ; and this is all that there is any neces- 
sity of affirming to establish the fact that over-accumu- 
lation and general glut can occur. In the sense of our dis- 
cussion, labor is a commodity, though not a material one. 
"When the possibility of a general glut is asserted, it is not 
meant that both labor and material commodities may be in 
excess, but only that all material things may be in excess 
as compared with labor — the one great immaterial com- 
modity. In that sense, and it is the sense in which its ad- 
vocates have really used the term, a more or less general 
glut is not only a possible but a frequ.ent occurrence. 

As this is an important point in the discussion, I make 
another quotation from Mill — premising that a "gen- 
eral glut " is the result of over-accumulation and not of 
over-production. Excessive production, supposing such a 
thing possible, need not necessarily result in accumulation 
at all. To affirm that over-production and over-accumu- 
lation are equivalent things, can only be done on the sup- 
position that Mill's definition of capital coincides with 
Ricardo's ; or, in other words, that all wealth destined 
for productive consumption immediately constitutes the 
wages-fund. 

Accumulation will ordinarily be large when the pro- 
duction is great, because production will not be great un- 
less profits are high, and savings are mainly made from 
profits ; but there is no necessary connection between 
them, as many things can intervene to prevent accumu- 



26 CAPITAL AND POPULATION". 

lation in such times. Tiiere is, of course, a tendency for 
rapid production to result in excessive accumulation ; and 
it is the counteraction of this tendency that Mill argues 
against and that I advocate. 

To fully present Mill's reasoning to the reader, I here 
quote at great length from Book III, chapter xiv, sec- 
tion 1 : 

" After the elementary exposition of the theory of money con- 
tained in the last few chapters, we shall return to a question in the 
general theory of value, which could not be satisfactorily discussed 
until the nature and operations of money were in some measure 
understood, because the errors, against which we have to contend, 
mainly originate in a misunderstanding of these operations. 

"We have seen that the value of everything gravitates toward a 
certain medium point (which has been called the natural value), 
namely, that at which it exchanges for every other thing in the ratio 
of their cost of production. "We have seen, too, that the actual or 
market value coincides, or nearly so, with the natural value only 
on an average of years, and is continually either rising above or 
falling below it, from alterations in the demand, or casual fluctuations 
in the supply ; but that these variations correct themselves, through 
the tendency of the supply to accommodate itself to the demand 
which exists for the commodity at its natural value. A general con- 
vergence thus results from the balance of opposite divergences. 
Dearth, or scarcity, on the one hand, and over-supply, or, in mercan- 
tile language, glut, on the other, are incident to all commodities. 
In the first case the commodity affords to the producers or sellers, 
while the deficiency lasts, an unusually high rate of profit ; in the 
second, the supply being in excess of that for which a demand 
exists, at such a value as will afford the ordinary profit, the sellers 
must be content with less, and must, in extreme cases, submit to a 
loss. 

" Because this phenomenon of over-supply, and consequent incon- 
venience or loss to the producer or dealer, may exist in the case of 
any one commodity whatever, many persons, including some dis- 
tinguished political economists, have thought that it may exist with 
regard to all commodities ; that there may be a general over-pro- 



INCREASE OF CAPITAL. 27 

dnction of wealth ; a supply of commodities in tlie aggregate, sur- 
passing the demand; and a consequent depressed condition of all 
classes of producers. Against this doctrine, of which Mr. Malthus 
and Dr. Chalmers in this country, and M. de Sismondi on the Con- 
tinent, were the chief apostles, I have already contended in the 
First Book ; * but it was not possible, in that stage of our inquiry, 
to enter into a complete examination of an error (as I conceive) es- 
sentially grounded on a misunderstanding of the phenomena of value 
and price. 

" The doctrine appears to me to involve so much inconsistency 
in its very conception, that I feel considerable difficulty in giving 
any statement of it which shall be at once clear, and satisfactory to 
its supporters. They agree in maintaining that there may be, and 
sometimes is, an excess of productions in general beyond the de- 
mand for them ; that when this happens, purchasers can not be 
found at prices which will repay the cost of production with a profit ; 
that there ensues a general depression of prices or values (they 
are seldom accurate in discriminating between the two), so that 
producers, the more they produce, find themselves the poorer, in- 
stead of richer; and Dr. Chalmers accordingly inculcates on capital- 
ists the practice of a moral restraint in reference to the pursuit of 
gain ; while Sismondi deprecates machinery, and the various inven- 
tions which increase productive power. They both maintain that 
accumulation of capital may proceed too fast, not merely for the 
moral but for the material interests of those who produce and accu- 
mulate ; and they enjoin the rich to guard against this evil by an 
ample unproductive consumption. 

" When these writers speak of the supply of commodities as out- 
running the demand, it is not clear which of the two elements of 
demand they have in view — the desire to possess, or the means of 
purchase ; whether their meaning is that there are, in such cases, 
more consumable products in existence than the public desires to 
consume, or merely more than it is able to pay for. In this uncer- 
tainty, it is necessary to examine both suppositions. 

" First, let us suppose that the quantity of commodities produced 
is not greater than the community would be glad to consume ; is it, 
in that case, possible that there should be a deficiency of demand 

* Supra, pp. 41-43. 



28 CAPITAL AND POPULATION. 

for all commodities, for want of the means of payment? Those who 
think so, can not have considered what it is which constitutes the 
means of payment for commodities. It is, simply, commodities 
Each person's means of paying for the productions of other people 
consists of those which he himself possesses. All sellers are inevita- 
bly, and by the meaning of the word, buyers. Could we suddenly 
double the productive powers of the country, we should double the 
supply of commodities in every market ; but we should, by the same 
stroke, double the purchasing power. Everybody would bring a doub- 
le demand as well as supply ; everybody would be able to buy twice 
as much, because every one would have twice as much to offer in ex- 
change. It is probable, indeed, that there would now be a superfluity 
of certain things. Although the community would willingly double 
its aggregate consumption, it may ah-eady have as much as it desires 
of some commodities, and it may prefer to do more than double its 
consumption of others, or to exercise its increased purchasing power 
on some new thing. If so, the supply will adapt itself accordingly, 
and the values of things will continue to conform to their cost of pro- 
duction. At any rate, it is a sheer absurdity that all things should 
fall in value, and that all producers should, in consequence, be in- 
sufficiently remunerated. If values remain the same, what becomes 
of prices is immaterial, since the remuneration of producers does 
not depend on how much money but on how much of consumable 
articles they obtain for their goods. Besides, money is a commodity ; 
and if all commodities are supposed to be doubled in quantity, we 
must suppose money to be doubled too, and then prices would no 
more fall than values would. 

" A general over-supply, or excess of all commodities above the 
demand, so far as demand consists in means of payment, is thus 
shown to be an impossibility. But it may, perhaps, be supposed 
that it is not the ability to purchase, but the desire to possess, that 
falls short, and that the general produce of industry may be greater 
than the community desires to consume — the part, at least, of the 
community which has an equivalent to give. It is evident enough 
that produce makes a market for produce, and that there is wealth 
in the country with which to purchase all the wealth in the coun- 
try ; but those who have the means may not have the wants, and 
those who have the wants may be without the means. A portion, 
therefore, of the commodities produced may be unable to find a 



mOREASE OF CAPITAL. 29 

market, from the absence of means in those who have the desire to 
consume, and the want of desire in those who have the means. 

"This is much the most plausible form of the doctrine, and does 
not, like that which we first examined, involve a contradiction. 
There may easily be a greater quantity of any particular commodity 
than is desired by those who have the ability to purchase, and it is 
abstractedly conceivable that this might be the case with all com- 
modities. The error is in not perceiving that, though all who have 
an equivalent to give might be fully provided with every consum- 
able article which they desire, the fact that they go on adding to 
the production proves that this is not actually the case. Assume 
the most favorable hypothesis for the purpose, that of a limited 
community, every member of which possesses as much of necessa- 
ries and of all known luxuries as he desires ; and since it is not 
conceivable that persons whose wants were completely satisfied 
would labor and economize to obtain what they did not desire, 
suppose that a foreigner arrives, and produces an additional quan- 
tity of something of which there was already enough. Here, it will 
be said, is over-production; true, I reply; over-production of that 
particular article : the community wanted no more of that, but it 
wanted something. The old inhabitants, indeed, wanted nothing; 
but did not the foreigner himself want something? When he pro- 
duced the superfluous article, was he laboring without a motive? 
He has produced, but the wrong thing instead of the right. He 
wanted, perhaps, food, and has produced watches, with which 
everybody was sufiiciently supplied. The new-comer brought with 
him into the country a demand for commodities equal to all that he 
could produce by his industry, and it was his business to see that 
the supply he brought should be suitable to that demand. If he 
could not produce something capable of exciting a new want or 
desire in the community, for the satisfaction of which some one 
would grow more food and give it to him in exchange, he had the 
alternative of growing food for himself; either on fresh land, if 
there was any unoccupied, or as a tenant, or partner, or servant, of 
some former occupier, willing to be partially relieved from labor. 
He has produced a thing not wanted, instead of what was wanted ; 
and he himself, perhaps, is not the kind of producer who is wanted; 
but there is no over-production ; production is not excessive but 
merely ill-assorted. We saw before that whoever brings additional 



30 CAPITAL AN-D POPULATION". 

commodities to the market, brings an additional power of purchase; 
we now see that he brings also an additional desire to consume; 
since, if he had not that desire, he would not have troubled himself 
to produce. Neither of the elements of demand, therefore, can be 
wanting when there is an additional supply ; though it is perfectly 
possible that the demand may be for one thing, and the supply may 
unfortunately consist of another. 

"Driven to his last retreat, an opponent may perhaps allege 
that there are persons who produce and accumulate from mere 
habit; not because they have any object in growing richer, or 
desire to add in any respect to their consumption, but from vis 
inertice. They continue producing because the machine is ready 
mounted, and save and reinvest their savings because they have 
nothing on which they care to expend them. I grant that this is 
possible, and in some few instances probably happens; but these do 
not in the smallest degree affect our conclusion. For, what do these 
persons do with their savings ? They invest them productively ; * 
that is, expend them in employing labor. In other words, having a 
purchasing power belonging to them, more than they know what to 
do with, they make over the surplus of it for the general benefit of 
the laboring class. IsTow, will that class also not know what to do 
with it ? Are we to suppose that they too have their wants per- 
fectly satisfied, and go on laboring from mere habit? Until this is 
the case ; until the working classes have also reached the point of 
satiety — there will be no want of demand for the produce of capital, 
however rapidly it may accumulate ; since, if there is nothing else 
for it to do, it can always find employment in producing the neces- 
saries or luxuries of the laboring class. And when they too had no 
further desire for necessaries or luxuries, they would take the benefit 
of any further increase of wages by diminishing their work ; so that 
the over-production, which then for the first time would be possible 
in idea, could not even then take place in fact, for want of laborers. 
Thus, in whatever manner the question is looked at, even though we 
go to the extreme verge of possibility to invent a supposition favor- 
able to it, the theory of general over-production implies an absurdity. 

* That is just what they do not do — they add them to dead stock, and 
keep them inactive until the rate of profit tempts them to employ them 
productively. 



INCREASE OF CAPITAL. 31 

" What, then, is it by which men who have reflected much on 
economical phenomena, and have even contributed to throw new 
light upon them by original speculations, have been led to embrace 
so irrational a doctrine ? I conceive them to have been deceived by 
a mistaken interpretation of certain mercantile facts. Tbey imag- 
ined that the possibility of a general over-supply of commodities was 
proved by experience. They believed that they saw this phenome- 
non in certain conditions of the markets, the true explanation of 
■which is totally different. 

"I have already described the state of the markets for commodi- 
ties which accompanies what is termed a commercial crisis. At 
such times there is really an excess of all commodities above the 
money-demand ; in other words, there is an under-snpply of money. 
From the sudden annihilation of a great mass of credit, every one 
dislikes to part with ready money, and many are anxious to procure 
it at any sacrifice. Almost everybody, therefore, is a seller, and 
there are scarcely any buyers : so that there may really be, though 
only while the crisis lasts, an extreme depression of general prices 
from what may be indiscriminately called a glut of commodities or 
a dearth of money. But it is a great error to suppose, with Sis- 
mondi, that a commercial crisis is the effect of a general excess of 
production. It is simply the consequence of an excess of specula- 
tive purchases. It is not a gradual advent of low prices, but a sud- 
den recoil from prices extravagantly high : its immediate cause is a 
contraction of credit, and the remedy is not a diminution of supply, 
but the restoration of confidence. It is also evident that this tem- 
porary derangement of markets is an evil only because it is tempo- 
rary. The fall being solely of money-prices, if prices did not rise 
again no dealer would lose, since the smaller price would be worth 
as much to him as the larger price was before. In no manner does 
this phenomenon answer to the description which these celebrated 
economists have given of the evil of over-production. That perma- 
nent decline in the circumstances of producers, for want of markets, 
which those writers contemplate, is a conception to which the nat- 
ure of a commercial crisis gives no support. 

" The other phenomenon from which the notion of a general ex- 
cess of wealth and superfluity of accumulation seems to derive coun- 
tenance, is one of a more permanent nature, namely, the faU of 
profits and interest which naturally takes place with the progress of 



32 CAPITAL AND POPULATION. 

population and production. The cause of this decline of profit is the 
increased cost of maintaining labor, which results from an increase 
of population and of the demand for food outstripping the advance 
of agricultural improvement. This important feature in the eco- 
nomical progress of nations will receive full consideration and dis- 
cussion in the succeeding book. It is obviously a totally different 
thing from a want of market for commodities, though often con- 
founded with it in the complaints of the producing and trading 
classes. The true interpretation of tJie modern or present state of 
industrial economy is, that there is hardly any amount of lusiness 
which may not de done if people will be content to do it on small 
profits; and this all active and intelligent persons in business per- 
fectly well know : but even those who comply with the necessities 
of their time, grumble at what they comply with, and wish that 
there were less capital ; or, as they express it, less competition, in 
order that there might be greater profits. Low profits, however, 
are a different thing from deficiency of demand, and the production 
and accumulations, which merely reduce profits, can not be called 
excess of supply or production. What the phenomenon really is, 
and its effects and necessary limits, will be seen when we treat of 
that express subject. 

"I know not of any economical facts, except the two I have 
specified, which can have given occasion to the opinion that a gen- 
eral over-production of commodities ever presented itself in actual 
experience. I am convinced that there is no fact in commercial 
affairs which, in order to its explanation, stands in need of that 
chimerical supposition. 

"The point is fundamental; any difference of opinion on it in- 
volves radically different conceptions of political economy, especially 
in its practical aspect. On the one view, we have only to consider 
how a sufficient production may be combined with the best possible 
distribution ; but, on the other, there is a third thing to be consid- 
ered: how a market can be created for produce, or how production 
can be limited to the capabilities of the market. Besides, a theory 
so essentially self-contradictory can not intrude itself without carry- 
ing confusion into the very heart of the subject, and making it im- 
possible even to conceive with any distinctness many of the more 
complicated economical workings of society. This error has been, 
I conceive, fatal to the systems, as systems, of the three distinguished 



mCEEASE OF CAPITAL. 33 

economists to whom I have referred — Maltlius, Chalmers, and Sis- 
mondi — all of whom have admirably conceived and explained several 
of the elementary theorems of political economy; but this fatal mis- 
conception has spread itself, like a veil, between them and the more 
difficult portions of the subject, not suffering one ray of light to 
penetrate. Still more is this same confused idea constantly crossing 
and bewildering the speculations of minds inferior to theirs. It is 
bnt justice to two eminent names, to call attention to the fact that 
the merit of having placed this most important point in its true 
light belongs principally, on the Continent, to the judicious J. B. 
Say, and in this country to Mr. Mill, who (besides the conclusive 
exposition which he gave of the subject in his 'Elements of Polit- 
ical Economy ') had set forth the correct doctrine with great force 
and clearness in an early pamphlet, called forth by a temporary con- 
troversy, and entitled ' Commerce Defended ' ; the first of his writ- 
ings which attained any celebrity, and which he prized more as 
having been his first introduction to the friendship of David Ricardo, 
the most valued and most intimate friendship of his life." 

It is, of course, needless to point ont that here again 
Mill uses capital in the sense of Kicardo. It will also be 
noticed that over-accumulation and over-production are 
not at all distinguished, and that arguments valid against 
the latter are taken for granted as valid against the for- 
mer also. 

As to the argument, it is, of course, true when money 
and labor are considered as commodities ; but what the 
advocates of over-accumulation assert, and what Mill is 
really interested in denying, is only that the amount of 
all material commodities can be and sometimes is excess- 
ive. That this is what Mill opposes is evident from sec- 
tion 4, in which he refuses to accejDt over-accumulation 
as an explanation of panics. It would be too absurd to 
suppose that any one claimed that panics were due to an 
excess of labor as well as of material commodities ; and, 
therefore, Mill's meaning must be that the excess of 



34 CAPITAL AND POPULATION. 

material commodities lias no influence in leading to in- 
dustrial stagnation. This is the objective point of his 
whole argument, and all his disciples, notably Bonamy 
Price and Fawcett, have so understood and accepted him, 
and in the most unequivocal terms have attributed the 
lessened production of sach periods to the general pov- 
erty resulting from the extravagance of preceding periods 
of high profits and large production. 

Now, it is evident that the whole argument, contained 
in the quotation I have last made, is inapplicable to the 
conclusion thus drawn. Fortunately, there is a test which 
can not but be accepted, as decisive between the view of 
Mill's disciples and my own, by any who doubt. To this 
test I am anxious to draw the closest attention, as no one 
who appreciates its significance can, I think, fail to agree 
with me. If any particular panic and the period of 
industrial idleness which follows it are caused hy the 
poverty of the community — i. e.^ l)y the amount of mate- 
rial commodities heing less than usual — the rate of profit 
during such panic and p)eriod will he high {not the rate 
of interest^ which is then liable to molent fi^ictuations and 
does not at all indicate the rate of profif) / for what capi- 
tal is left in the community can not fail of finding pi'ofit- 
dhle employment. If on the contrary^ the rate of profit 
is low, it can he due to no other cause than that capital 
hears a larger proportion than ttsual to popidation. 

In Book II, chapter viii, section 3, Mill, speaking of 
prices, says : 

" It is to be remarked that tMs ratio would be precisely that in 
which the quantity of money had been increased. If the whole 
money in circulation was doubled, prices would be doubled. If it 
was only increased one fourth, prices would rise one fourth. There 
would be one fourth more money, all of which would be used to 



mCEEASE OF CAPITAL. 35 

purchase goods of some description. When there had been time for 
the increased supply of money to reach all markets, or (according to 
the conventional metaphor) to permeate all the channels of circula- 
tion, all prices would have risen one fourth. But the general rise 
of prices is independent of this diffusing and equalizing process. 
Even if some prices were raised more, and others less, the average 
rise would be one fourth. This is a necessary consequence of the 
fact that a fourth more money would have been given for only the 
same quantity of goods. General prices, therefore, would in any 
case be a fourth higher. 

"The very same effect would be produced on prices if we sup- 
pose the goods diminished, instead of the money increased ; and the 
contrary effect if the goods were increased, or the money dimin- 
ished. If there were less money in the hands of the community, 
and the same ampunt of goods to be sold, less money altogether 
would be given for them, and they would be sold at lower prices ; 
lower, too, in the precise ratio in which the money was diminished. 
So that the value of money, other things being the same, varies in- 
versely as its quantity; every increase of quantity lowering the 
value, and every diminution raising it, in a ratio exactly equiva- 
lent. 

" This, it must be observed, is a property peculiar to money. We 
did not find it to be true of commodities generally that every dimi- 
nution of supply raised the value exactly in proportion to the defi- 
ciency, or that every increase lowered it in the precise ratio of the 
excess. Some things are usually affected in a greater ratio than 
that of the excess of deficiency, others usually in a less ; because, in 
ordinary cases of demand, the desire, being for the thing itself, may 
be stronger or weaker ; and the amount of what people are willing 
to expend on it, being in any case a limited quantity, maybe affected 
in very unequal degrees by difficulty or facility of attainment. But 
in the case of money, which is desired as the means of universal 
purchase, the demand consists of everything which people have to 
sell ; and the only limit to what they are willing to give, is the 
limit set by their having nothing more to offer. The whole of the 
goods being in any case exchanged for the whole of the money which 
comes into the market to be laid out, they will sell for less or more 
of it, exactly according as less or more is bought. 

" From what precedes, it might for a moment be supposed that 



36 CAPITAL AND POPULATION. 

all the goods on sale in a country at any one time, are exchanged 
for all the money existing and in circulation at that same time ; or, 
in other words, that there is always in circulation in a country a 
quantity of money equal in value to the whole of the goods then 
and there on sale. But this would be a complete misapprehension. 
The money laid out is equal in value to the goods it purchases; but 
the quantity of money laid out is not the same thing with the quan- 
tity in circulation. As the money passes from hand to hand, the 
same piece of money is laid out many times, before all the things on 
sale at one time are purchased and finally removed from the market ; 
and each pound or dollar must be counted for as many pounds or 
dollars as the number of times it changes hands, in order to effect 
this object." 

This passage supplies anotlier test of whether any par- 
ticular period of activity or stagnation is due to a large 
or small amount of disposable wealth. If, for instance, 
low prices generally prevail during a period of inactivity, 
it shows that the stock of commodities must be large as 
compared with the stock of money. If the industrial in- 
activity is due to a scarcity of circulating capital, using 
the term according to Mill's definition, prices should be 
high, unless there has been an enormous exportation of 
gold ; but the movement of gold — except when driven out 
by an irredeemable currency, which then becomes money, 
and, as far as prices are affected, supplies its function — is 
always too insignificant to account for the variations in 
general prices which occur, as will be evident when we 
reflect that the rise or fall must always be mathematically 
proportional; that is, if the stock of commodities remains 
the same, one quarter of the gold of the country must be 
exported to account for a fall in general prices of twenty- 
five per cent, and, if the stock of commodities has also 
diminished, it would only account for a fall proportion- 
ally less by the percentage of such diminution. We are 



INCREASE OF CAPITAL. 37"; 

forced, therefore, to account for such falls in general 
prices by supposing that they are due to an actual in- 
crease of material commodities. As prices are always 
low during hard, and high during flush times, it neces- 
sarily follows that it is during the former that the amount 
of material wealth is greatest. 

We see, therefore, that low prices prevailing during 
any period of stagnation are an indication that the de- 
pression is not caused by poverty, but by excessive accu- 
mulations ; but they are not as good a test as that of low 
profits. If any improvement be made, such, for instance, 
as the establishment of a clearing-house, other things re- 
maining the same, a certain amount of gold is not needed 
and must be exported. This can only be effected through 
a rise in prices. Rapidity of circulation tends to raise 
prices, and sluggishness to depress them. During good 
times, therefore, the greater efficiency of money tends to 
raise prices beyond the point they would otherwise attain, 
and during bad times its greater sluggishness correspond- 
ingly depresses them. This produces the same effect 
upon prices as the proportion between money and other 
commodities, and low prices are not, therefore, as accurate 
a test as low profits of the true cause of the industrial in- 
activity, but they possess the advantage of being more 
readily ascertained and compared. 

Mill admits that any one commodity may be in ex- 
cess. He must therefore also grant that all but one can 
be so. If that one exception is labor, his opponents have 
granted to them all they claim and he denies. Mill truly 
says : 

" The point is fundamental ; any difference of opinion on it in- 
volves radically different conceptions of political economy, especially 
in its practical aspect." 



38 CAPITAL AI^D POPULATIOlSr. 

But he is at sea when he goes on to assert : 

" On the one view, we have only to consider how a sufficient 
production may be combined with the best possible distribution ; 
but, on the other, there is a third thing to be considered — how a 
market can be created for produce, or how a production can be lim- 
ited to the capabilities of the market." 

The practical application of the theory of over-accu- 
mulation involves no such considerations as he here sup- 
poses. It indeed concerns itself with limiting the ten- 
dency to accumulate, but it effects by this a greater not a 
lessened production, and all it does to secure a " market " 
is to endeavor to sustain a rate of profit under which pro- 
duction can go on most readily. 

As to Say's famous argument, with which I am in en- 
tire accord, it is enough to call attention to the fact that, 
though commodities, no matter how great their quantity, 
will exchange for each other freely, if they are produced 
in such proportions as to satisfy the desires of those who 
exert an efficient demand, such proportions are ipso facto 
not sustained when a certain and natural proportion be- 
tween the demand for productive and for unproductive 
consumption is not maintained. My whole position is 
granted by Mill when he says, " The true interpretation of 
the modern or present state of industrial economy is, that 
there is hardly any amount of business which may not be 
done, if people will be content to do it on small profits." 
Yery well, then. Let us attribute our periods of indus- 
trial inactivity to low profits. Nothing is more certain 
than that people will cease producing as profits decline, 
and that they must so decline when capital increases faster 
than population. 

I complain of Mill, not only that he is confused in his 
theoretical conceptions as to capital and accumulation, but 



INCREASE OF CAPITAL. 39 

that he entirely failed to appreciate their practical bear- 
ing upon production, as is evidenced by his attempt to 
explain panics as due alone to the action of credit, and 
by his constant exhortations to abstinence. 

Let us now turn to Kicardo, who, in his chapter on 
" Taxes on Raw Produce," page 95, says : 

"An accumulation of capital naturally produces an increased 
competition among the employers of labor, and a consequent rise in 
its price." 

If in this sentence he uses the term " capital " accord- 
ing to his own definition, he is not entitled to use the term 
" accumulation of capital " at all, as applied to circulating 
capital, which alone affects the competition for labor. 
Capital, according to him, being merely the wages-fund, 
does not become capital until it is expended, and is phys- 
ically incapable of being accumulated ; or, if we suppose 
him to include under capital funds set apart for the main- 
tenance of the laborer until the product he is then en- 
gaged upon is brought to market, there can be no increase 
of the wages-fund beyond that amount. Anything set 
apart for the employment of labor, beyond that at the 
time employed, is not capital in his sense, but in Mill's. 
But it is only such increase of capital that can affect the 
competition for labor. The demand for and supply of 
labor do not at all depend upon capital, in his sense of 
the term. The wages-fund is the effect and not the cause 
of the demand for labor. The word, therefore, must be 
used in the sense in which Mill defines the term, and in 
that sense his assertion is inaccurate. 

Population being stationary, an increase of capital 
beyond the limits I have pointed out decreases the de- 
mand for labor. The demand for labor must, then, depend 



40 CAPITAL AND POPULATION". 

upon sometliing else. The proportion that determines 
the demand is not between commodities already in exist- 
ence and the number of laborers, but between the com- 
modities needed, or supposed to be needed, sufficiently to 
sell for a profit, and the number of laborers. It is not 
between the accumulations of past production and labor, 
but between the amount of future production and labor. 
\ But the amount of future production supposed to be need- 
ed will be least when things already in existence are most 
[ plenty, and greatest when they are scarce, and the direct 
; opposite of Ricardo's assertion as to the demand for labor 
11 is what really follows. As to its price, he is right if he 
j means relative price, but not otherwise. 

As a rule, Ricardo is more faithful to his definition 
than Mill is to his. Accepting his faulty definition, his 
conclusions are accurately true. Mill, on the other hand, 
persistently asserts Ricardo's conclusions as also true of 
capital as he defines it, and is, therefore, much more at 
fault than his predecessor. Sometimes, however, as in 
our quotation, Ricardo himself applies conclusions only 
true of the wages-fund to capital in its broader and truer 
signification. 

Although not strictly in the line of our argument, it 
may be well here to notice the principle enunciated by 
Mill, that the demand for commodities is not a demand 
for labor, as it is connected with our subject, and its con- 
sideration will throw additional light on the discussion. 
This proposition has attained the place of the pons asi- 
noTum of political economy. It remains an insoluble 
puzzle to most minds, as, although they perceive Mill's 
reasoning to be irrefutable, they can not get rid of the 
conviction that it really makes no difference, in the amount 
of labor that finds employment, whether it is employed 



mCREASE OF CAPITAL. 41 

directly bj themselves or by the funds that they turn 
over to others. 

The proposition is enunciated in the following pas- 
sage, Book I, chapter v, section 9, of Mill's work : 

" We now pass to a fourth, fandamental theorem respecting 
capital, which is, perhaps, oftener overlooked or misconceived than 
even any of the foregoing. What supports and employs productive ; 
labor is the capital expended in setting it to work, and not the de- [ 
mand of purchasers for the produce of the labor when completed. ; 
Demand forcommodities is not demand for labor. The demand for 
commodities determines in what particular branch of production 
the labor and capital shall be employed ; it determines the direc- 
tion of the labor, but not the more or less of the labor itself, or of 
the maintenance or payment of the labor. These depend on the 
amount of the capital or other funds directly devoted to the suste- 
nance and remuneration of labor. 

" Suppose, for instance, that there is a demand for velvet ; a 
fund ready to be laid out in buying velvet, but no capital to estab- 
lish the manufacture. It is of no consequence how great the de- 
mand may be, unless capital is attracted into the occupation, there 
will be no velvet made, and consequently none bought ; unless, in- 
deed, the desire of the intending purchaser for it is so strong that 
he employs part of the price he would have paid for it in making 
advances to work-people, that they may employ themselves in mak- 
ing velvet ; that is, unless he converts part of his income into capi- 
tal, and invest that capital in the manufacture. Let us now reverse 
the hypothesis, and suppose that there is plenty of capital ready for 
making velvet, but no demand. Velvet will not be made ; but there 
is no particular preference on the part of capital for making velvet. 
Manufacturers and their laborers do not produce for the pleasure of 
their customers, but for the supply of their own wants, and having 
still the capital and the labor which are the essentials of production, 
they can either produce something else which is in demand, or, if 
there be no other demand, they themselves have one, and can pro- 
duce the things which they want for their own consumption. So 
that the employment afforded to labor does not depend on the pur- 
chasers, but on the capital. I am, of course, not taking into con- 



42 CAPITAL AND POPULATION. 

sideration the effects of a sudden change. If the demand ceases un- 
expectedly after the commodity to supply it is already produced, this 
introduces a different element into the question ; the capital has actu- 
ally been consumed in producing something which nobody wants or 
uses, and it has therefore perished, and the employment which it 
gave to labor is at an end, not because there is no longer a demand, 
but because there is no longer a capital. This case, therefore, does 
not test the principle. The proper test is to suppose that the change 
is gradual and foreseen, and is attended with no waste of capital, 
the manufacture being discontinued by merely not replacing the 
machinery as it wears out, and not reinvesting the money as it 
comes in from the sale of the produce. The capital is thus ready for 
a new employment, in which it will maintain as much labor as before. 
The manufacturer and his work-people lose the benefit of the skill 
and knowledge which they had acquired in the particular business, 
and which can only be partially of use to them in any other ; and 
that is the amount of loss to the community by the change. But the 
laborers can still work, and the capital which previously employed 
them will, either in the same hands or by being lent to others, em- 
ploy either those laborers or an equivalent number in some other 
occupation. 

" This theorem — that to purchase produce is not to employ labor ; 
that the demand for labor is constituted by the wages which pre- 
cede the production, and not by the demand which may exist for 
the commodities resulting from the production — is a proposition 
which greatly needs all the illustration it can receive. It is, to com- 
mon apprehension, a paradox ; and even among political economists 
of reputation, I can hardly point to any, except Mr. Eicardo and M. 
Say, who have kept it constantly and steadily in view. Almost aU 
others occasionally express themselves as if a person who buys 
commodities, the produce of labor, was an employer of labor, and 
created a demand for it as really, and in the same sense, as if he 
bought the labor itself directly by the payment of wages. It is no 
wonder that political economy advances slowly when such a ques- 
tion as this still remains open at its very threshold. I apprehend 
that if by demand for labor be meant the demand by which wages 
are raised, or the number of laborers in employment increased, de- 
mand for commodities does not constitute demand for labor. I 
conceive that a person who buys commodities and consumes them 



mCREASE OF CAPITAL. 43 

himself does no good to the laboring classes ; and that it is only by 
what he abstains from consuming and expends in direct payments to 
laborers in exchange for labor, that he benefits the laboring classes 
or adds anything to the amount of their employment. 

"For the better illustration of the principle, let us put the fol- 
lowing case : A consumer may expend his income either in buying 
services or commodities. He may employ part of it in hiring jour- 
neymen brick -layers to build a house, or excavators to dig artificial 
lakes, or laborers to make plantations and lay out pleasure-grounds ; 
or, instead of this, he may expend the same value in buying velvet 
and laces. The question is, whether the difference between these 
two modes of expending his income affects the interest of the labor- 
ing classes. It is plain that in the first of the two cases he employs 
laborers who will be out of employment, or, at least, out of that 
employment in the opposite case. But those from whom I difi'er 
say that this is of no consequence, because in buying velvet and lace 
he equally employs laborers, namely, those who make the velvet 
and lace. I contend, however, that in this last case he does not 
employ laborers ; but merely decides in what kind of work some 
other person shall employ them. The consumer does not, with his 
own funds, pay to the weavers and lace-makers their day's wages. 
He buys the finished commodity, which has been produced by labor 
and capital, the labor not being paid nor the capital furnished by him, 
but by the manufacturer. Suppose that he had been in the habit of 
expending this portion of his income in hiring journeymen brick- 
layers, who laid out the amount of their wages in food and clothing, 
which were also produced by labor and capital. He, however, deter- 
mined to prefer velvet, for which he thus creates an extra demand. 
This demand can not be satisfied without an extra capital ; where, 
then, is the capital to come from ? There is nothing in the consumer's 
change of purpose which makes the capital of the country greater 
than it otherwise was. It appears, then, that the increased demand 
for velvet could not for the present be supplied were it not that the 
very circumstance which gave rise to it has set at liberty a capital ot 
the exact amount required. The very sum which the consumer 
now employs in buying velvet, formerly passed into the hands of 
journeymen brick-layers, who expended it in food and necessaries, 
which they now either go without, or squeeze by their competition 
from the shares of other laborers. The labor and capital, therefore. 



44 CAPITAL AND POPULATION. 

which formerly produced necessaries for the use of these brick-layers 
are deprived of their market, and must look out for other employ- 
ment ; and they find it in making velvet for the new demand. I do 
not mean that the very same labor and capital which produced the 
necessaries turn themselves to producing the velvet; but, in some 
one or other of a hundred modes, they take the place of that which 
does. There was capital in existence to do one of two things — to 
make the velvet, or to produce necessaries for the journeymen brick- 
layers; but not to do both. It was at the option of the customer 
which of the two should happen; and if he chooses the velvet, 
they go without the necessaries. 

" For further illustration, let us suppose the same case reversed. 
The consumer has been accustomed to buy velvet, but resolves to 
discontinue that expense, and to employ the same annual sum in 
hiring brick-layers. If the common opinion be correct, this change 
in the mode of his expenditure gives no additional employment to 
labor, but only transfers employment from velvet-makers to brick- 
layers. On closer inspection, however, it will be seen that there is 
an increase of the total sum applied to the remuneration of labor. 
The velvet manufacturer, supposiug him aware of the diminished 
demand for his commodity, diminishes the production and sets at 
liberty a corresponding portion of the capital employed in the manu- 
facture. This capital, thus withdrawn from the maintenance of 
velvet-makers, is not the same fund with that which the customer 
employs in maintaining brick-layers ; it is a second fund. There 
are, therefore, two funds to be employed in the maintenance and 
remuneration of labor, where before there was only one. There is 
not a transfer of employment from velvet-makers to brick-layers ; 
there is a new employment created for brick-layers, and a transfer 
of employment from velvet-makers to some other laborers, most 
probably those who produce the food and other things which the 
brick-layers consume. 

" In answer to this it is said that the money laid out in buying 
velvet is not capital, it replaces capital ; that, though it does not 
create a new demand for labor, it is the necessary means of en- 
abling the existing demands to be kept up. The funds (it may be 
said) of the manufacturer, while locked up in velvet, can not be 
directly applied to the maintenance of labor ; they do not begin to 
constitute a demand for labor until the velvet is sold, and the capital 



INCEEASE OF CAPITAL. 45 

which made it replaced from the outlay of the purchaser; and 
thus, it may be said, the velvet-maker and the velvet-buyer have 
not two capitals, but only one capital between them, which by the 
act of purchase the buyer transfers to the manufacturer ; and if, 
instead of buying velvet he buys labor, he simply transfers this 
capital elsewhere, extinguishing as much demand for labor in one 
quarter as he creates in another. 

" The premises of this argument are not denied. To set free a 
capital which would otherwise be locked up in a form useless for 
the support of labor is, no doubt, the same thing to the interests of 
laborers as the creation of a new capital. It is perfectly true that 
if I expend £1,000 in buying velvet, I enable the manufacturer to 
employ £1,000 in the maintenance of labor, which could not have 
been so employed while the velvet remained unsold ; and if it would 
have remained unsold for ever unless I bought it, then by changing 
my purpose and hiring brick-layers instead, I undoubtedly create no 
new demand for labor, for while I employ £1,000 in hiring labor on 
the one hand, I annihilate for ever £1,000 of the velvet-maker's 
capital on the other. But this is confounding the effects arising 
from the mere suddenness of a change with the effects of the change 
itself. If, when the buyer ceased to purchase, the capital employed 
in making velv^et for his use necessarily perished, then his expend- 
ing the same amount in hiring brick-layers would be no creation, but 
merely a transfer of employment. The increased employment which 
I contend is given to labor, would not be given unless the capital 
of the velvet-maker could be liberated, and would not be given 
until it was liberated. But every one knows that the capital in- 
vested in an employment can be withdrawn from it, if sufficient 
time be allowed. If the velvet-maker had previous notice, by not 
receiving the usual order, he will have produced £1,000 less velvet, 
and an equivalent portion of his capital will have been already set 
free. If he had no previous notice, and the article consequently 
remains on his hands, the increase of his stock will induce him next 
year to suspend or diminish his production until the surplus is car- 
ried off. When this process is complete, the manufacturer will find 
himself as rich as before, with undiminished power of employing 
labor in general, though a portion of his capital will now be em- 
ployed in maintaining some other kind of it. Until this adjustment 
has taken place, the demand for labor will be merely changed, not 



46 CAPITAL AND POPULATION. 

increased ; but, as soon as it has taken place, the demand for labor 
is increased. Where there was formerly only capital employed in 
maintaining weavers to make £1,000 worth of velvet, there is now 
that same capital employed in making something else, and £1,000 
distributed among brick-layers besides. There are now two capitals 
employed in remunerating two sets of laborers, while before one of 
those capitals, that of the customer, only served as a wheel in the 
machinery by which the other capital, that of the manufacturer, 
carried on its employment of labor from year to year. 

" The proposition for which I am contending is in reality equiva- 
lent to the following, which to some minds will appear a truism, 
though to others it is a paradox : that a person does good to labor- 
ers, not by what he consumes on himself, but solely by what he 
does not so consume. If, instead of laying out £100 in wine or silk, 
I expend it in wages, the demand for commodities is precisely equal 
in both cases ; in the one it is the demand for £100 worth of wine 
or silk; in the other, for the same value of bread, beer, laborers' 
clothing, fuel, and indulgences : but the laborers of the community 
have in the latter case the value of £100 more of the produce of 
the community distributed among them. I have consumed that 
much less, and made over my consuming power to them. If it were 
not so, my having consumed less would not leave more to be con- 
sumed by others, which is a manifest contradiction. When less 
is not produced, what one person forbears to consume is necessarily 
added to the share of those to whom he transfers his power of pur- 
chase. In the case supposed I do not necessarily consume less ulti- 
mately, since the laborers whom I pay may build a house forme, or 
make something else for my future consumption. But I have at all 
events postponed my consumption, and have turned over part of 
my share of the present produce of the community to the laborers. 
If after an interval I am indemnified, it is not from existing prod- 
uce, but from a subsequent addition made to it. I have there- 
fore left more of the existing produce to be consumed by others ; 
and have put into the possession of laborers the power to consume 
it." 

That the demand for commodities is not a demand for 
labor as here enunciated assumes that productive con- 
sumption can take the place of unproductive indefinitely, 



INCREASE OF CAPITAL, 47 

while the truth is, it can only do so for a limited pe- 
riod, and must be followed by a comparative increase of 
unproductive, equal or greater in amount, usually the 
latter. Let us vary Mill's illustration by supposing the 
demand of the individual possessing £1,000 to be for 
a house to live in, and that he will decide to buy a 
house, or build for himself, according as either action 
will most benefit the laboring classes. If he decides to 
buy, his demand in principle is the same as if he ex- 
pended the one thousand pounds for velvet. If he de- 
cides to build, he undoubtedly gives additional employ- 
ment to labor at the time. But if the society in which he 
lives is increasing in capital faster than in population, or 
will do so at some future time, sooner or later, some- 
where in the land, a house will not be built which would 
have been built if he had not anticipated such action. If, 
at the time he builds, houses are already in excess, the 
house that he would have bought if he had not built will 
remain unoccupied, or will serve by lowering rentals as a 
discouragement to others building, and he will only have 
anticipated the demand for labor by a very short inter- 
val. If there happens to be a scarcity of houses, his build- 
ing one lessens that scarcity and will prevent others sup- 
plying it by just one house. He has then only anticipated 
the demand for labor, but by a somewhat less interval 
than when houses are plenty. He can not at all increase 
the wages-fund, taking one year with another, by his de- 
cision between buying and building. He can, however, 
benefit the situation of the laboring class by equalizing 
in some slight degree the demand for labor, which he 
could effect by building in depressed and by buying in 
prosperous times. The contrary, however, is the usual 
course of those desiring houses, as they are prone to buy 
3 



48 CAPITAL AND POPULATION. 

in depressed and build in prosperous times, because tliey 
find an individual profit in so doing. 

The proposition tliat the demand for commodities is 
not a demand for labor has therefore little or no signifi- 
cance, but is merely a verbal distinction, utterly unworthy 
of the prominence it has attained, and has no bearing in 
any way or shape on the arguments here advanced, except 
as such arguments afford the solution of the puzzle. If, 
however, instead of a house or any other article of pro- 
longed consumption possessed of exchangeable value, the 
owner of the one thousand pounds employs labor to pro- 
duce objects of no utility — as, for instance, if he employed 
them in removing and then bringing back a pile of bricks 
— ^he would benefit the laboring class at his own expense. 
His expenditure would be purely of the nature of a gift 
to his employes ; likewise, if he employs labor in personal 
services the utility of which perishes in the doing, he 
certainly adds to the wages-fund. But even then he 
makes no permanent addition to it, nor does he when his 
expenditure is of the nature of a gift, even when the 
funds he expends come from dead stock, or from active 
stock the product of which was destined by him to serve 
as capital. If he restricts his own unproductive consump- 
tion to obtain, in lieu of it, personal service, he disturbs 
the normal ratio between capital and population ; as the 
amount of capital remains the same, while the number 
of laborers seeking employment is less by the number of 
them employed by him. This results in a rise of propor- 
tional wages and fall of profits, which leads to a decline 
of productive consumption until the ratio is adjusted, and 
there is for a time less employment for laborers than if 
he had expended the one thousand pounds unproductively. 
If his demand for services is permanent, population re- 



INCEEASE OF CAPITAL. 49 

maining the same, there is a permanent decline in tlie 
normal amount of capital, and the nation is permanently 
poorer in accumulated wealth than it would have been if 
his expenditure had been for ]:^productive consumption I 
of material things. This permanent loss will be to the ' 
detriment, not of the rate but of the gross amount of / 
profits, and the wages-fund will ' be as large as, but no- 
large?;.. tharB, before. 

If the one thousand pounds be taken from capital or 
from funds which would have been added to capital, 
our supposed employer of labor in services would lessen 
equally the amount of capital and the number of produc- 
tive laborers, except to the degree in which he disturbed 
the normal ratio of fixed to circulating capital ; i. e., labor 
employed in personal services requiring no fixed capital 
to speak of, the same amount of capital would employ 
more labor than before, which would entail some slight 
decline in profits, and the employment of labor. As be- 
fore, the community at large will be able to retain some- 
what less of capitalized wealth, while the wages-fund will 
be unafiected. 

Every diversion of labor from productive to unpro- 
ductive employment necessarily decreases the number of 
laborers productively engaged and the amount of capital 
that can he utilized — and can not^ as Mill practically 
claims^ at all increase the total number or remuneration 
of laborers employed productively and unproductively. 

If Mill is right in claiming that the demand for com- 
modities is not a demand for labor, it would follow that the 
greater the demand for services the better the condition 
of the laborer should be. During feudal times this de- 
mand was very much greater than it has ever since been, 
but the rates of both proportional and real wages were 



50 CAPITAL AND POPULATION. 

then normally lower than at present, and no one will claim 
that a return to feudal customs would now be of any 
benefit to laborers, nor that it would not certainly lead 
to an enormous decrease in capitalized wealth, and the 
annual product of material things. The appeal to facts, 
therefore, is decidedly against Mill's ingenious theory. 

The world can elect what proportion of its labor shall 
be utilized productively, and what in services, but it can 
not increase the amount of services and enjoy the same 
amount of material products as before ; and this, when 
analyzed, is what the proposition, that the demand for 
commodities is not a demand for labor, really asserts. 

Certain economists propose to include services under 
the term " wealth." To this misuse of language I can not 
agree ; not that I deny that services possess exchangeable 
value, but because the distinction between material and 
immaterial things is too radical. The latter can neither 
be accumulated nor distributed, and the discovery of the 
laws governing the accumulation and distribution of 
material wealth is the chief object of the science. As 
we have seen, services, although not themselves material 
things, nevertheless affect the production and accumula- 
tion of material things, and possess as well both value 
and utility. They come certainly under the cognizance 
of the science, but as causes, not effects. They them- 
selves stand in but little need of explanation, but aid in 
explaining what does. 



CHAPTEE III. 

THE TENDENCY OF CAPITAL TO OUTSTEIP POPULATION. 

I HAYE now reached the more agreeable task of show- 
ing that mj views of the nature and limits of capital dif- 
fer from those of Mill and Ricardo mainly in the manner 
of statement, and are not essentially diverse. I do, in- 
deed, object most strenuously to the way in which they 
present the subject ; as I hold that it prevents in great 
part the practical application of economic ideas, and leads 
these great thinkers, as we shall see later on, to several 
erroneous theoretical conclusions. I may be pardoned if 
I quote somewhat more extensively than the argument 
strictly calls for, on account of my personal anxiety to be 
considered rather as supplementing than as supplanting 
their contributions to the science. 

To commence, then, with Mill, I will first quote from 
Book I, chapter xi, section 3 : 

"When a country has carried production as far as in the existing 
state of knowledge it can be carried, with an amount of return cor- 
responding to the average strength of the effective desire of accu- 
mulation in that country, it has reached what is called the stationary 
state — the state in which no further addition will be made to capi- 
tal unless there takes place either some improvement in the arts of 
production, or an increase in the strength of the desire to accumu- 
late. In the stationary state, though capital does not on the whole 
increase, some persons grow richer and others poorer. Those 
whose degree of providence is below the usual standard, become im- 
poverished, their capital perishes, and makes room for the savings 



52 CAPITAL AND POPULATION. 

of those whose effective desire of accumulation exceeds the average. 
These become the natural purchasers of the land, manufactories, and 
other instruments of production owned by their less provident coun- 
trymen." 

Also from Book TV, cliapter iv, section 5 1 

" I now say that the mere continuance of the present annual in- 
crease of capital, if no circumstance occurred to counteract its effect, 
would suffice in a small number of years to reduce the rate of net 
profit to one per cent. 

"To fulfill the conditions of the hypothesis, we must suppose an 
entire cessation of the exportation of capital for foreign investment. 
No more capital sent abroad for railways or loans ; no more emi- 
grants taking capital with them to the colonies, or to other coun- 
tries ; no fresh advances made, or credits given, by bankers or mer- 
chants to their foreign correspondents. We must also assume that 
there are no fresh loans for unproductive expenditure by the gov- 
ernment, or on mortgage, or otherwise ; and none of the waste of 
capital which now takes place by the failure of undertakings, which 
people are tempted to engage in by the hope of a better income than 
can be obtained in safe paths at the present habitually low rate of 
profit. "We must suppose the entire savings of the community to be 
annually invested in really productive employment within the coun- 
try itself; and no new channels opened by industrial inventions, or 
by a more extensive substitution of the best-known processes for 
inferior ones. 

"Few persons would hesitate to say that there would be great 
difficulty in finding remunerative employment every year for so 
much new capital, and most would conclude that there would be 
what used to be termed a general glut ; that commodities would be 
produced, and remain unsold, or be sold only at a loss. But the full 
examination which we have already given to this question has 
shown that this is not the mode in which the inconvenience would 
be experienced. The difficulty would not consist in any want of 
market. If the new capital were duly shared with many varieties 
of employment, it would raise up a demand for its own produce, 
and there would be no cause why any part of that produce should 
remain longer on hand than formerly. What would really be, not 



k 



TENDENCY OF CAPITAL TO OUTSTRIP POPULATION. 53 

merely difficult, but impossible, would be to employ tbis capital 
witbout submitting to a rapid deduction of tbe rate of profit. 

"As capital increased, population either would also increase, or 
it would not. If it did not, wages would rise, and a greater capital 
would be distributed in wages among tbe same number of laborers. 
There being no more labor than before, and no improvements to 
render the labor more efficient, there would not be any increase of 
the produce ; and as the capital, however largely increased, would 
only obtain the -same gross return, the whole savings of each year 
would be exactly so much subtracted from the profits of the next 
and of every following year. It is hardly necessary to say that in 
some circumstances profits would very soon fall to the point at 
which further increase of capital would cease. An augmentation 
of capital, much more rapid than that of 2^optdation, must soon 
reach its extreme limit, unless accompanied by increased efficiency 
of labor (through inventions and discoveries, or improved mental 
and physical education), or unless some of the idle people, or of the 
unproductive laborers, became productive," 

And, again, from Book I, chapter xiii, section 1 : 

*' But there are other countries, and England is at the head of 
them, in which neither the spirit of industry nor the effective desire 
of accumulation heed any encouragement ; where the people will 
toil hard for a small remuneration, and save much for a small profit ; 
where, though the general thriftiness of the laboring class is much 
below what is desirable, the spirit of accumulation in the more pros- 
perous part of the community requires abatement rather than in- 
crease. In these countries there would never be any deficiency of 
capital, if its increase were never checked or brought to a stand by 
too great a diminution of its returns." 

And from Book lY, chapter v, section 1 : 

"It must always have been seen, more or less distinctly, by 
political economists, that the increase of wealth is not boundless; 
that at the end of what they term the progressive state lies the 
stationary state ; that all progress in wealth is but a postponement 
of this, and that each step in advance is an approach to it. We 
have now dee?i led to recognize that this ultimate goal is at all times 



54 CAPITAL AND POPULATION. 

near enough to le fully in mew ; that we are always on the verge 
of it, and that, if we have not reached it long ago, it is because the 
goal itself flies before us. The richest and most prosperous coun- 
tries would very soon attain the stationary state, if no further im- 
provements were made in the productive arts, and if there were a 
suspension of the overflow of capital from those countries into the 
uncultivated or ill-cultivated regions of the earth." 

And from Book Y, chapter iv, section 4 : 

"In England the great emigration of capital, and the almost 
periodical occurrence of commercial crises through the speculations 
occasioned by the habitually low rate of profit, are indications that 
profit has attained the practical though not the ultimate minimum, 
and that all the savings which take place (beyond what improve- 
ments, tending to the cheapening of necessaries, make room for) 
are either sent abroad for investment or periodically swept away." 

To this I must object that no destruction of capital or 
wealth in any form occurs during a panic. The excess 
of capital is not " swept away " in any sense of the term. 
It is not even devoted to unproductive consumption, as 
that itself in such times is lessened. The readjustment 
comes, and can only come, from a decrease in productive 
consumption, greater than the accompanying decrease in 
unproductive. If unproductive consumption did not de- 
crease, the proper ratio of capital to population would be 
obtained much sooner than it now is, viz., when produc- 
tion had been decreased to an amount exactly equal to 
the previous over-accumulation; and the only loss that 
society would suffer would be what it would have lost 
if the superabundant capital had been destroyed by fire, 
or in any manner consumed without affording any enjoy- 
ment or satisfaction. But the curtailment of unproduc- 
tive consumption adds to this loss one of many times its 
extent, viz., the loss for ever of all those enjoyments 



TENDENCY OF CAPITAL TO OUTSTRIP POPULATION. 55 

wliich individuals have foregone by lessening their un- 
productive consumption, in their endeavor to retain their 
own capital unimpaired ; or rather the loss of the produc- 
tion v^hich would have satisfied such unproductive con- 
sumption. There is here a case where individual are 
opposed to social interests. By retrenching expenditure 
the individual adds to, or at least retains more of, his 
capital ; but he does it at the expense of the capital of 
his fellow-citizens. The capital that the community can 
permanently employ, including his own, is actually less- 
ened by his accretions when the general capital has in- 
creased more rapidly than population. 
Again, in Book I, chapter v, section 7 : 

"This perpetual consumption and reproduction of capital affords 
the explanation of what has so often excited wonder, the great ra- 
pidity with which countries recover from a state of devastation; 
the disappearance, in a short time, of all traces of the mischiefs done 
by earthquakes, floods, hurricanes, and the ravages of war. An 
enemy lays waste a country by fire and sword, and destroys or car- 
ries away nearly all the movable wealth existing in it ; all the in- 
habitants are ruined, and yet, in a few years after, everything is 
much as it was before. This vis medicatrix naturm has been a sub- 
ject of sterile astonishment, or has been cited to exemplify the won- 
derful strength of the principle of saving, which can repair such 
enormous losses in so brief an interval. There is nothing at all 
wonderful in the matter. "What the enemy have destroyed, would 
have been destroyed in a little time by the inhabitants themselves ; 
the wealth which they so rapidly reproduce, would have needed to 
be reproduced and would have been reproduced in any case, and 
probably in as short a time. Nothing is changed, except that dur- j 
ing the reproduction they have not now the advantage of consum- 
ing what had been produced previously. The possiMlity of a rapid 
repair of their disasters mainly depends on whether the country has 
'been depopulated. If its effective population have not been extir- 
pated at the time, and are not starved afterward, then, with the 
same skill and knowledge which they had before, with their land 



56 CAPITAL AND POPULATIOl!^. 

and its permanent improvements undestrojed, and the more durable 
buildings probably unimpaired, or only partially injured, they have 
nearly all the requisites for their former amount of production. If 
there is as much of food left to them, or of valuables to buy food, 
as enables them by any amount of privation to remain alive and in 
working condition, they will in a short time have raised as great a 
produce, and acquired collectively as great wealth and as great a 
capital, as before, by the mere continuance of that ordinary amount 
of exertion which they are accustomed to employ in their occupa- 
tions. Nor does this evince any strength in the principle of saving, 
in the popular sense of the term, since what takes place is not in- 
tentional abstinence, but involuntary privation." 

And, finally, Book lY, chapter iv, section 4 ; 

""We now arrive at the fundamental proposition which this 
chapter is intended to inculcate. When a country has long possessed 
a large production, and a large net income to make savings from, 
and when, therefore, the means have long existed of making a great 
annual addition to capital (the country not having, like America, a 
large reserve of fertile land still unused), it is one of the chief char- 
acteristics of such a country, that the rate of profit is habitually 
within, as it were, a hand's breadth of the minimum, and the country, 
therefore, on the very verge of the stationary state. By this I do 
not mean that this state is likely, in any of the great countries of 
Europe, to be soon actually reached, or that capital does not stiU 
yield a profit considerably greater than what is barely sufficient to 
induce the people of those countries to save and accumulate." 

I will also quote Ricardo in this connection, calling 
attention to the fact that he here uses capital in Mill's 
sense, and can not mean by it the wages-fund — although 
most of his assertions are only true of the wages-fund — 
as no increase of that beyond the increase of population 
is conceivable. 

Eicardo's works, chapter xxi, page 174 : 

*' No accumulation of capital will permanently lower profits, un- 
less there be some permanent cause for the rise in wages. If the 



TENDENCY OF CAPITAL TO OUTSTEIP POPULATION. 57 

funds for the maintenance of labor were doubled, tripled, or quad- 
rupled, there would not long be any difficulty in procuring the nec- 
essary number of hands to be employed by those funds, but, owing 
to the increasing difficulty of making constant additions to the food 
of the country, funds of the same value would probably not maintain 
the same quantity of labor. If the necessaries of the workmen could 
be constantly increased with the same facility, there could be no 
permanent alteration in the rate of profit or wages, to whatever 
amount capital might be accumulated. Adam Smith, however, uni- 
formly ascribes the faU^of profits to the accumulation of capital, to 
the competition which will result from it, without ever adverting to 
the increasing difficulty of providing food for the additional number 
of laborers which the additional capital will employ.* ' The increase 
of stock,' he says, ' which raises wages tends to lower profits.' 
Adam Smith speaks here of a rise of wages, but it is a temporary 
rise proceeding from increased funds before the population is in- 
creased, and he does not appear to see that, at the same time that 
the capital is increased, the work to be effected by capital is in- 
creased in the same proportion. M. Say has, however, most satis- 
factorily shown that there is no amount of capital which may not 
be employed in a country, because demand is only limited by produc- 
tion. No man produces but with a view to consume or sell, and he 
never sells but with an intention to purchase some other commodity, 
which may be immediately useful to him or which may contribute 
to future production. By producing, then, he necessarily becomes 
either the consumer of his own goods, or the purchaser and con- 
sumer of the goods of some other person. 

" There can not then be accumulated in a country any amount of 
capital which can not be employed productively until wages rise so 
high in consequence of the rise of necessaries, and so little conse- 
quently remains for the profits of st'ock, that the motive for accu- 
mulation ceases. 

" Whether these increased productions, and the consequent de- 
mand which they occasion, shall or shall not lower profits, depends 
solely on the rise of wages ; and the rise of wages, excepting for a 
limited period, on the facility of producing the food and necessaries 
of the laborer ; I say for a hmited period, because no point is better 
established than that the supply of laborers will always ultimately 
be in proportion to the means of supporting them. 



58 CAPITAL AND POPULATION. 

" There is only one case, and that will be temporary, in which 
the accumulation of capital, with a low price of food, may be at- 
tended with a fall of profits, and that is, when the funds for the 
maintenance of labor increase much more rapidly than population ; 
wages will then he high, and profits low. If every man were to fore- 
go the use of luxuries and be intent only on accumulation, a quantity 
of necessaries might be produced for which there could not be any 
immediate consumption. Of commodities so limited in number there 
might undoubtedly be a universal glut, and consequently there 
might neither be demand for an additional quantity of such commod- 
ities nor profits on the employment of more capital. If men ceased 
to consume they would cease to produce — this admission does not 
impugn the general principle." 

Without any separate criticism of tliese quotations, I 
am justified in asserting that, with much from which I 
dissent, they contain or imply every one of my premises 
and deductions, except that of the influence of increase 
of capital upon population. That the conclusions of 
Ricardo and Mill differ from mine, is owing solely to 
their ambiguous use of the term " capital." Every one 
of the principles I have advocated, with the above excep- 
tion, they enunciate distinctly, except that they usually, 
but not always, assume that capital, in Mill's seuse, and 
the wages-fund, i. e., capital, in Hicardo's sense, vary 
together ; whereas I hold that they vary inversely, other 
things, of course, remaining the same. In this assertion 
there can be no doubt that I am right and they wrong ; 
and it is readily seen that they fell into their error from 
not fully perceiving all the implications of their own defi- 
nitions of capital, and through taking it for granted that 
what was true of it in one tense was true of it in all, and 
from the misleading supposition that a low rate of j)rofit 
was a stimulus to population. 

But I differ from them in a matter I have not yet 



TENDEN'CY OF CAPITAL TO OUTSTRIP POPULATION. 59 

touched upon, except by implication, viz., in my views 
as to what constitutes the progressive, stationary, and 
retrogressive states of society ; and the difference is im- 
portant, as the soundness of my position here will affect 
the truth of deductions to be made later on, the practical 
application of which will profoundly influence the eco- 
nomic policy w^hich nations should adopt to secure for 
themselves the greatest possible share of the world's 
products, and to increase to the highest point their own 
productive efficiency. 

The circumstance that seems to me important is the 
determination of the question whether the net produce 
of a nation bears an increasing, a decreasing, or a steady 
ratio to its population. If the inGomeper capita of its 
people is growing larger, I should say it was enjoying an 
economic progress ; if smaller, that it was going backward, 
irrespective of whether such advance or retrogression was 
accompanied by a growth or decline of the total wealth 
and population.* It is, indeed, true that any increase 
in net income per capita is usually accompanied by an 
increase in the aggregate of accumulation and of popula- 
tion ; but the latter must be distinguished from the for- 
mer as being its effect and counteractant. It is its effect, 
because any increase in net income is an additional stimu- 
lus to population ; and its counteractant, because every in- 
crease of numbers lowers the margin of cultivation, and 
because every increase of capital beyond that of popula- 
tion decreases the capacity of the nation to produce by 
lessening the number of laborers employed : but there is 
no necessary connection between increase of net income 

* In net income I would include tlie income of immediate satisfactions 
and enjoyments derived from commodities reserved for prolonged unpro- 
ductive consumption, as well as of those derived from services. 



60 CAPITAL AND POPULATION. 

and population, or between a large annual production and 
accumulation. When people understand and fully ap- 
preciate the working of economic laws, they will endeavor 
to dissociate them, and there is no reason why they should 
be unsuccessful in such efforts. When this is effected, 
advantages gained in productive efficiency will not be 
wasted in a mere increase of numbers, or be frittered 
away and made barren of enjoyment by the attempt 
to possess more capitalized wealth than economic law 
allows. 

Strictly speaking, there is no stationary state of so- 
ciety at all. The perpetual flux and reflux of human 
events prevent such a state from being more than mo- 
mentary, a mere turning-point between the progressive 
and the retrogressive, or vice versa. When the growth 
in net incomes, in which I consider the progressive state 
to consist,' is counteracted by the growth of aggregate 
capital and population, which Mill seems to consider as 
constituting it, society pauses stationary for a moment, 
and then enters the retrogressive state, in which its annual 
produce and net income decline, and this proceeds until 
the consequent decrease of capital and population checks 
society in its downward course, and it again momentarily 
pauses, in a second and lower stationary state, from which 
an advance is once more effected. If, on the whole, a na- 
tion progresses in wealth, population, and the average in- 
come of its inhabitants (without this last ingredient, I 
refuse to accept it as progress at all), it is not, as Mill 
seems to suppose, because it has never entered the station- 
ary or retrogressive states, but because its passage through 
the progressive state has been longer, and has more influ- 
enced its economic condition, than its passage through 
the others. The progress of society is due, not to ground 



TENDENCY OF CAPITAL TO OUTSTRIP POPULATION". 61 

never being lost, but to the fact that, while much is re- 
peatedly lost, more has been gained : like the incoming 
tide, each wave has reached a higher level than its 
predecessor. 

Mill, and Kicardo with him, seems to have considered 
the stationary state of society as never practically reached, 
and to have thought it somewhat problematical that it 
ever would be. They would both freely admit the con- 
clusions I have drawn, as well as those to be hereafter 
deduced, as applicable to such a social condition, and, 
when induced to admit that all civilized nations complete 
the round of the three states in constantly recurring 
periods of about ten years, they could not but regard the 
validity of my conclusions as established. The possibil- 
ity of capital pressing upon population is clearly recog- 
nized by them. If they had recognized that this press- 
ure is not only an abstract possibility, but an actually 
existent economic fact, and that the pressure of capital 
upon population is as constant and steady as that of pop- 
ulation upon the food-supply, they could not have failed 
to draw as important conclusions from the principle they 
neglected, as being merely theoretical, as they did draw 
from the theory of Malthus. 

That the tendency of capital to increase faster than 
population is steady and constant, whenever and wher- 
ever men in their economic actions are undisturbed by 
abnormal events, is the central thought of this treatise, 
and is the contribution I bring to the science of political 
economy. 

I do not mean by this that capital constantly increases 
more rapidly than population, any more than Malthus 
meant that population always increased faster than its 
food-supply. The increase of capital and of population 



62 CAPITAL AND POPULATION. 

both have their checks, which operate in very similar 
manner. 

Profits are the means of support to capital, as truly 
and very much in the same sense as food is the means of 
support to population. The checks upon both capital and 
population operate in the same manner, and not only 
often forbid further increase, but sometimes demand an 
actual decrease. It is not the increase of either popula- 
tion or capital that is constant, but the tendency to such 
increase heyond their economic limits. 

I must not be understood as asserting that all human 
societies show this tendency in a periodical increase of 
capital beyond the needs of population. Whenever and 
wherever capital is physically insufficient to furnish the 
amount of wages-fund that can be profitably employed, 
the limitations to capital are removed as long as such 
condition lasts. In one sense all barbarous, semi-civilized, 
and despotic countries, where there is but scanty security 
for life and property, can be said to be in this condition, 
and the checks to accumulation in them are moral and 
social, and not economic. What I mean is, that in the 
absence of war, famine, and bad government, capital will 
constantly tend to outstrip population, will periodically 
succeed in so doing, and will be in excess, to the detriment 
of production for a greater or less portion of the time. 
The analogy between the pressure it exerts and that ex- 
erted by population on the margin of cultivation is as 
perfect as it is the nature of any analogy to be. Even 
taking Mill's definition of what constitutes the stationary 
state, viz., the decline of the rate of profit to the minimum 
and the cessation of accumulation, what is more evident 
than that such decline is the most important occurrence 
in every period of industrial stagnation, and that not only 



TENDEiTCY OF CAPITAL TO OUTSTRIP POPULATION 63 

in STich times is the stationary state as defined by him 
reached, but that the rate of profit then declines below 
the minimum and carries the community for a time into 
the retrogressive state in which a decrease of production 
takes place ? That the state of civilized communities is 
still on the average progressive, is certainly no proof that 
the other states are not occasionally reached. A perma- 
nent stationary or retrogressive state can not occur until 
all the fertile land of the globe is reclaimed^ and then 
only in the absence of further improvements and inven- 
tions, and of a decrease of population, except, indeed, pop- 
ulation increases as fast as, or faster than, the reclamation 
of fertile land. The condition of mankind in the station- 
ary and retrogressive states, instead, however, of being a 
curious problem, the solution of which has a practical in- 
terest for future generations alone, is a topic of pressing 
importance. 



CHAPTEE lY. 



FIXED CAPITAL, 

"Theee is a great diiFerence between the effects of circulating 
and those of fixed capital, on the amount of the gross produce of 
the countrj. Circulating capital being destroyed as such., or at any 
rate finally lost to the owner, by a single use, and the product re- 
sulting from that one use being the only source from which the 
owner can replace the capital, or obtain any remuneration for its 
productive employment, the product must of course be sufficient 
for those purposes ; or, in other words, the result of a single use 
must be a reproduction equal to the whole amount of the circulating 
capital used, and a profit besides. This, however, is by no means 
necessary in the case of fixed capital. Since machinery, for exam- 
ple, is not wholly consumed by one use, it is not necessary that it 
should be wholly replaced from the product of that use. The ma- 
chine answers the purpose of its owner, if it brings in, during each 
interval of time, enough to cover the expense of repairs, and the 
deterioration in value which the machine has sustained during the 
same time, with a surplus sufficient to yield the ordinary profit on 
the entire value of the machine. 

" From this it follows that all increase of fixed capital^ when 
talcing place at the expense of circulating^ must he at least tempora- 
rily prejudicial to the interests of the laborers. This is true, not of 
machinery alone, but of all improvements by which capital is sunk ; 
that is, rendered permanently incapable of being applied to the 
maintenance and remuneration of labor. Suppose that a person 
farms his own land, with a capital of two thousand quarters of 
corn, employed in maintaining laborers during one year (for sim- 
plicity we omit the consideration of seed and tools), whose labor 



FIXED CAPITAL. 65 

produces him annuallj two thousand four hundred quarters, being 
a profit of twenty per cent. This profit we shall suppose that he 
annually consumes, carrying on his operations from year to year on 
the original capital of two thousand quarters. Let us now suppose 
that, by the expenditure of half his capital, he efiects a permanent 
improvement of his land, which is executed by half his laborers, 
and occupies them for a year, after which he will only require, for 
the effectual cultivation of his land, half as many laborers as before. 
The remainder of his capital he employs as usual. In the first year 
there is no difference in the condition of the laborers, except that 
part of them have received the same pay for an operation on the 
land which they previously obtained for plowing, sowing, and reap- 
ing. At the end of the year, however, the improver has not, as 
before, a capital of two thousand quarters of corn. Only one thou- 
sand quarters of his capital have been reproduced in the usual way : 
he has now only those thousand quarters and his improvements. 
He will employ, in the next and in each following year, only half 
the number of laborers, and will divide among them only half the 
former quantity of subsistence. The loss wdll soon be made up to 
them if the improved land, with the diminished quantity of labor, 
;groduces two thousand four hundred quarters as before, because so 
enormous an accession of gain will probably induce the improver to 
save a part, add it to his capital, and become a larger employer of 
labor. But it is conceivable that this may not be the case ; for 
(supposing, as we may do, that the improvement will last indefi- 
nitely, without any outlay worth mentioning to keep it up) the 
improver will have gained largely by his improvement if the land 
now yields, not two thousand four hundred, but one thousand five 
hundred quarters ; since this will replace the one thousand quarters 
forming his present circulating capital, with a profit of twenty-five 
per cent (instead of twenty as before) on the whole capital, fixed 
and circulating together. The improvement, tlierefore, may be a 
very profitable one to him, and yet very injurious to the laborers. 

"The supposition, in the terms in which it has been stated, is 
purely ideal ; or at most applicable only to such a case as that of 
the conversion of arable land into pasture, which, though formerly 
a frequent practice, is regarded by modern agriculturists as the re- 
verse of an improvement. The clearing away of the small farmers 
in the north of Scotland, within the present century, was, however, 



QQ CAPITAL AN-D POPULATION". 

a case of it ; and Ireland, since the potato famine and the repeal 
of the corn-laws, is another. The remarkable decrease which has 
lately attracted notice in the gross produce of Irish agriculture is, 
to all appearance, partly attributable to the diversion of land from 
maintaining human laborers to feeding cattle ; and it could not have 
taken place without the removal of a large part of the Irish popula- 
tion by emigration or death. We have thus two recent instances in 
which what was regarded as an agricultural improvement has dimin- 
ished the power of the country to support its population. The effect, 
however, of all the improvements due to modern science is to 
increase, or, at all events, not to diminish, the gross produce. But 
this does not affect the substance of the argument. Suppose that 
the improvement does not operate in the manner supposed — does 
not enable a part of the labor previously employed on the land to be 
dispensed with — but only enables the same labor to raise a greater 
produce. Suppose, too, that the greater produce, which by means 
of the improvement can be raised from the soil with the same labor, 
is all wanted, and will find purchasers. The improver will in that 
case require the same number of laborers as before, at the same 
wages. But where will he find the means of paying them? He 
has no longer his original capital of two thousand quarters dispos- 
able for the purpose. One thousand of them are lost and gone- 
consumed in making the improvement. If he is to employ as many 
laborers as before, and pay them as highly, he must borrow, or ob- 
tain from some other source, a thousand quarters to supply the 
deficit. But these thousand quarters already maintained, or were 
destined to maintain, an equivalent quantity of labor. They are 
not a fresh creation ; their destination is only changed from one 
productive employment to another ; and, though the agriculturist 
has made up the deficiency in his own circulating capital, the breach 
in the circulating capital of the community remains unrepaired." — 
(Mill, Book I, chapter vi, section 2.) 

The necessity wliicli the English school of economists 
labor under, of making it appear that industrial inactiv- 
ity is due to the scarcity of material wealth, or rather of 
circulating capital, has led them to assert that the increase 
of fixed capital often causes the decrease of the wages- 



FIXED CAPITAL. 67 

fund. They generally express themselves somewhat dif- 
ferently, and substitute the words " circulating capital " 
for wages-fund ; as, in the above passage, Mill says : 
" From this it follows that all increase of fixed capital, 
when taking place at the expense of circulating, must 
be, at least temporarily, prejudicial to the interests of ' 
the laborers." The passage is not true, unless circulating 
capital is understood as the wages-fund alone. It some- 
times happens that the increase of fixed capital is at the 
expense of the wages-fund, and Mill gives two instances 
where this has occurred ; but it is evident that such de- 
pletion of the wages-fund can not occur until the other 
part of circulating capital — dead stock — is first converted 
into fixed capital. But Mill evidently intends to convey 
the idea that all increase of fixed, at the expense of circu- 
lating capital (as defined by himself), is prejudicial to the 
laborers. On the contrary, it is evident that any deple- 
tion of dead stock by its conversion into fixed capital raises 
the rate of profit on active circulating stock, and leads to 
a further depletion of dead stock by the conversion of 
more of it into the wages-fund than would otherwise go 
there. The demand for labor resulting from the conver- 
sion of dead stock into fixed capital can not raise real, 
though it may money, wages, because while it is taking 
place the decrease of dead stock will cause the things in 
which wages are really paid to rise in money- value more 
than money- wages can by any possibility advance. What 
finally causes a rise in wages and a decline in the money- 
value of dead stock is, the demand for labor caused by 
the attempt to utilize such fixed capital ; and such rise of 
wages and fall in the value, as compared with wages, of 
dead stock, can only occur when the labor at first applied 
to the creation of fixed capital is employed in utilizing it 



68 CAPITAL AND POPULATION. 

in production, and has caused an increase of dead stock to 
such degree as to more than make uj) its de^pletion hy fixed 
capital. 

Over-investment, even when it is so great as to use up 
all the dead and part of the active stock besides, pnts oif 
the time when labor can not be profitably employed. Its 
action is that of an anticipated demand for labor, and its 
evil effects are not felt until the period of recuperation ; 
then the demand that has been anticipated can not be 
exerted. The idle factories and workshops stand ready 
to be utilized the moment there is a profit in using them ; 
and no more will be erected until their number becomes 
insufficient for the demands of industry. If, in times of 
stagnation, all superfluous fixed capital and dead stock 
were incontinently destroyed, it would lead to an almost 
immediate resumption of industrial activity. If this were 
habitually done, it would be greatly to the advantage of 
the laborers, as it would result in a permanent increase of 
the average amount of the wages-fund. ISTor would it be 
at all to the disadvantage of capitalists as a class ; on the 
contrary, they would gain by it, though not to the extent 
of the laborers. The real destruction of such property oc- 
curs when funds that should have gone to unproductive 
consumption were diverted to fixed capital, or retained as 
dead stock. Once suffered, the loss is irreparable ; but a 
further loss is entailed to both labor and capital by the 
continuance in existence of such property, prohibiting 
future production often to many times its own amount. 
I am not advocating any destruction of unprofitable stock ; 
that would certainly be impracticable without entailing 
great injustice to individuals ; but I am pleading against 
its creation. Such arbitrary destruction of superabun- 
dant capital does sometimes occur in the natural course 



FIXED CAPITAL. 69 

of human events, and is always followed by a season of 
great industrial activity. This explains the rapid recov- 
ary of nations from the effects of the most devastating 
wars, and their prosperity during their continuance, al- 
though the destruction of human life and the drain of 
laborers to the army largely counteract the effects of the 
depletion of capital. Witness the wonderful recovery of 
France from the terrible losses and enormous indemnity 
imposed upon her by Germany. Germany brought home 
with her milliards her own industrial ruin, and has un- 
dergone a loss in productive power many times greater 
than the sum she filched from her neighbor, while France 
is wealthier toj-day than before the enormous tribute was 
exacted. """ 

^"^ It is incorrect, therefore, to attribute the origin of our 
depressions to over-investment. What that really effects 
is, to defer their occurrence, and to prolong them when 
finally they do occur. 

That Mill's views really coincide with mine, as ex- 
pressed in this chapter, I also claim, and submit the fol- 
lowing extracts to prove the assertion, and shall leave 
them without further comment than the intelligent read- 
er can supply for himself from what has been said, and 
will. only ask that Mill's ambiguous use of the term "cap- 
ital " shall be constantly borne in mind : 

"The theory of the effect of accumulation on profits laid down 
in the preceding chapter, materially alters many of the practical 
conclusions which might otherwise be supposed to follow from the 
general principles of political economy, and which were, indeed, 
long admitted as true by the highest authorities on the subject. 

" It must greatly abate, or rather, altogether destroy, in coun- 
tries where profits are low, the immense importance which used to 
be attached by political economists to the effects which an event or 
a measure of government might have in adding to, or subtracting 



70 CAPITAL AND POPULATIOK 

from, the capital of the country. We have now seen that the low- 
ness of profits is a proof that the spirit of accumulation is so active, 
and that the increase of capital has proceeded at so rapid a rate, as 
to outstrip the two counter-agencies, improvements in production, 
and increased supply of cheap necessaries from abroad : and that 
unless a considerable portion of the annual increase of capital were 
either periodically destroyed, or exported for foreign investment, 
the country would speedily attain the point at which further accu- 
mulation would cease; or, at least, spontaneously slacken so as no 
longer to overpass the march of invention in the arts which pro- 
duce the necessaries of life. In such a state of things as this, a 
sudden addition to the capital of the country, unaccompanied by 
any increase of productive power, would be but of transitory du- 
ration; since by depressing profits and interest, it would either 
diminish by a corresponding amount the savings which would be 
made from income in the year or two following, or it would cause 
an equivalent amount to be sent abroad, or to be wasted in rash 
speculations. ISTeither, on the other hand, would a sudden abstrac- 
tion of capital, unless of inordinate amount, have any real effect in 
impoverishing the country. After a few months or years, there 
would exist in the country just as much capital as if none had been 
taken away. The abstraction, by raising profits and interest, would 
give a fresh stimulus to the accumulative principle, which would 
speedily fill up the vacuum. Probably, indeed, the only effect that 
would ensue, would be that for some time afterward less capital 
would be exported, and less thrown away in hazardous speculation. 
"In the first place, then, this view of things greatly weakens, in 
a wealthy and industrious country, the force of the economical argu- 
ment against the expenditure of public money for really valuable, 
even though industriously unproductive, purposes. If for any great 
object of justice or philanthropic policy, such as the industrial re- 
generation of Ireland, or a comprehensive measure of colonization 
or of public education, it were proposed to raise a large sum by way 
of loan, politicians need not demur to the abstraction of so much 
capital as tending to dry up the permanent sources of the country's 
wealth, and diminish the fund which supplies the subsistence of the 
laboring population. The utmost expense which could be requisite 
for any of these purposes would not, in all probability, deprive one 
laborer of employment, or diminish the next year's production by 



FIXED CAPITAL. Yl 

one ell of cloth or one bushel of grain. In poor countries, the cap- 
ital of the CO an try requires the legislator's sedulous care; he is 
bound to be most cautious of encroaching upon it, and should favor |//*'^ 
to the utmost its accumulation at home, and its introduction from 
abroad. But in rich, populous, and highly cultivated countries, it is 
not capital which is the deficient element, but fertile land ; and what 
the legislator should desire and promote, is not a greater aggregate ' ) 
saving, but a greater return to savings, either by improved cultiva- } '' 
tion, or by access to the produce of more fertile lands in other parts i 
of the globe. In such countries, the government may take any > 
moderate portion of the capital of the country and expend it as 
revenue, without affecting the national weath, the whole being 
either drawn from that portion of the annual savings which would 
otherwise be sent abroad, or being subtracted from the unproduc- 
tive expenditure of individuals for the next year or two, since every 
million spent makes room for another million to be saved before 
reaching the overflowTng' point. When the object in viev^ is worth / 
the sacrifice of such an amount of the expenditure that furnishes ^ 
the daily enjoyments of the people, the only well-grounded econom- 
ical objection against taking the necessary funds directly from cap- 
ital, consists of the inconveniences attending the pro'cess of raising 
a revenue by taxation, to pay the interest of a debt. 

" The same considerations enable us to throw aside as unworthy 
of regard one of the common arguments against emigration as a 
means of relief for the laboring class. Emigration, it is said, can 
do no good to the laborers, if, in order to defray the cost, as much 
must be taken away from the capital of the country as from its 
population. That anything like this proportion could require to be 
abstracted from capital for the purpose even of the most extensive 
colonization, few, I should think, would now assert ; but, even on that 
untenable supposition, it is an error to suppose that no benefit would 
be conferred on the laboring class. If one tenth of the laboring 
peojjle of England were transferred to the colonies, and along with 
them one tenth of the circulating capital of the country, either j 

wages or profits, or both, would be greatly benefited, by the dimin- I .._//' 
ished pressure of capital and population upon the fertility of the | '"^ 
land. There would be a reduced demand for food ; the inferior ' Ovv^> 
arable lands would be thrown out of cultivation, and would become 
pasture; the superior would be cultivated less highly, but with a / ,, 

-■•■" 4 " 

/ 



72 CAPITAL AND POPULATION. 

greater proportional return ; food would be lowered in price, and, 
though money-wages would not rise, every laborer would be con- 
siderably improved in circumstances — an improvement which, if no 
increased stimulus to population and fall of wages ensued, would be 
permanent ; while, if there did, profits would rise, and accumula- 
tion start forward so as to repair the loss of capital. The landlords 
alone would sustain some loss of income ; and even they, only if 
colonization went to the length of actually diminishing capital and 
population, but not if it merely carried off the annual increase. 

"From the same principles we are now able to arrive at a final 
conclusion respecting the effects which machinery, and generally the 
sinking of capital for a productive purpose, produce upon the im- 
mediate and ultimate interests of the laboring class. The charac- 
teristic property of this class of industrial improvements is the con- 
version of circulating capital into fixed ; and it was shown, in the 
first book, that, in a country where capital accumulates slowly, the 
introduction of machinery, permanent improvements of land, and 
the like, might be, for the time, extremely injurious ; since the capi- 
tal so employed might be directly taken from the wages-fund, the 
subsistence of the people and the employment for labor curtailed, 
and the gross annual produce of the country actually diminished. 
But, in a country of great annual savings and- lo,^j)rofitSj, no such 
effects need be apprehended. Since even the emigration of capital, 
or its unproductive expenditure, or its absolute waste, do not in 
such a country, if confined within any moderate bounds, at all di- 
minish the aggregate amount of the wages-fund, still less can the 
mere conversion of a like sum into fixed capital, which continues to 
be productive, have that effect. It merely draws off at one orifice 
what was already flowing out at another ; or, if not, the greater va- 
cant space left in the reservoir does but cause a greater quantity to 
flow in. Accordingly, in spite of the mischievous derangements of 
the money-market which have been occasioned by the sinking of 
great sums in railways, I was never able to agree with those who 
apprehended mischief from this source to the productive resources 
of the country. Not on the absurd ground (which to any one ac- 
quainted with the elements of the subject needs no confutation) that 
railway expenditure is a mere transfer of capital from hand to hand, 
by which nothing is lost or destroyed. This is true of what is spent 
in the purchase of the land ; a portion, too, of what is paid to par- 



r .. !3^^^ CAPITAL. 73 

liamentary agents, counsel, engineers, and surveyors, is saved by 
those who receive it, and becomes capital again ; but what is laid 
out in the lona Jide construction of the railway itself is lost and 
gone ; when once expended, it is incapable of ever being paid in 
wages or applied to the maintenance of laborers again ; as a matter 
of account, the result is that so much food and clothing and tools 
have been consumed, and the country has got a railway instead. 
But what I would urge is, that sums so applied are mostly a mere 
appropriation of the annual overflowing which would otherwise , 
have gone abroad, or been thrown away unprofitably, leaving neither ( 
a railway nor any other tangible result. The railway gambling of 
1844 and 1845 probably saved the country from a depression of 
profits and interest, and a rise of all public and private securities, 
which would have engendered still wilder speculations, and, when 
the eflfects came afterward to be complicated by the scarcity of food, 
would have ended in a still more formidable crisis than was experi- 
enced in the years immediately following. In the poorer countries 
of Europe, the rage for railway construction might have had worse 
consequences than in England, were it not that in those countries 
such enterprises are in a great measure carried on by foreign capi- 
tal. The railway operations of the various nations of the world 
may be looked upon as a sort of competition for the overflowing 
capital of the countries where profit is low and capital abundant, as 
England and Holland. The English railway speculations are a ) 
straggle to keep our annual increase of capital at home ; those of \ 
foreign countries are an effort to obtain it.* ^ 

"It already appears from these considerations that the conver- 
sion of circulating capital into fixed, whether by railways, or manu- 
factories, or ships, or machinery, or canals, or mines, or works of 
drainage and irrigation, is not likely, in any rich country, to di- 
minish the gross produce or the amount of employment for labor. 
How much, then, is the case strengthened, when we consider that 
these transformations of capital are of the nature of improvements 
in production, which, instead of ultimately diminishing circulating 

* It is hardly needful to point out how fully the remarks in the text 
have been verified by subsequent facts. The capital of the country, far 
from having been in any degree impaired by the large amount sunk in rail- 
way construction, was soon again overflowing. 

[Ivt ilV^ Itlv s \''" 



74 CAPITAL AND POPULATION, 

capital, are the necessary conditions of its increase ; since they alone 
enable a country to possess a constantly augmenting capital, with- 
out reducing profits to the rate which would cause accumulation to 
stop ! There is barely any increase of fixed capital which does not 
enable the country to contain eventually a larger circulating capital 
than it otherwise could possess and employ within its own limits; 
for there is hardly any creation of fixed capital which, when it 
proves successful, does not cheapen the articles on which wages are 
habitually expended. 

"Nevertheless, I do not believe that, as things are actually trans- 
acted, improvements in production are often, if ever, injurious, even 
temporarily, to the laboring classes in the aggregate. They would 
be so if they took place suddenly to a great amount, because much 
of the capital sunk must necessarily in that case be provided from 
funds already employed as circulating capital. But improvements 
are always introduced very gradually, and are seldom or never 
made by withdrawing circulating capital from actual production, 
but are made by the employment of the annual increase. There are 
few^ if any ^ examples of a great increase of fixed capital^ at a time 
and place where circulating capital loas not rapidly increasing lihe- 
wise. It is not in poor or backward countries that great and costly 
improvements in production are made. To sink capital in land for 
a permanent return, to introduce expensive machinery, are acts 
involving immediate sacrifice for distant objects, and indicate, in 
the first place, tolerably complete security of property; in the sec- 
ond, considerable activity of industrial enterprise; and, in the third, 
a high standard of what has been called the ' effective desire of ac- 
cumulation ' — which three things are the elements of a society rap- 
idly progressive in its amount of capital. Although, therefore, the 
laboring classes must suffer, not only if the increase of fixed capital 
takes place at the expense of circulating, but even if it is so large 
and rapid as to retard that ordinary increase to which the growth 
of population has habitually adapted itself; yet, in point of fact, 
this is very unlikely to happen, since there is probably no country 
whose fixed capital increases in a ratio more than proportional to 
its circulating. If the whole of the railways which, during the spec- 
ulative madness of 1845, obtained the sanction of Parliament, had 
been constructed in the times fixed for the completion of each, this 
improbable contingency would, most likely, have been realized; 



FIXED CAPITAL. 75 

bnt this very case has afforded a striking example of the difficulties 
which oppose the diversion into new channels of any considerable 
portion of the capital that supplies the old ; difficulties generally 
much more than sufficient to prevent enterprises that involve the 
sinking of capital from extending themselves with such rapidity as 
to impair the sources of the existing employment for labor. 

"To these considerations must be added that, even if improve- 
ments did for a time decrease the aggregate produce and the circu- 
lating capital of the community, they would not the less tend, in 
the long run, to augment both. They increase the return to capital ; 
and of this increase the benefit must necessarily accrue either to the 
capitalist in greater profits, or to the customer in diminished prices ; 
affording in either case an augmented fund from which accumula- 
tion may be made, while enlarged profits also hold out an increased 
inducement to accumulation." — (Mill, Book IV, chapter v, sections 
1 and 3.) 

One criticism is perliaps advisable on tlie last quota- 
tion. Mill says, '^ There are few, if any, examples of a 
great increase of fixed capital at a time and place where 
circulating capital was not rapidly increasing likewise =" 
As lie defines capital, this is hardly true : using the word 
according to Ricardo, it is true, because, as I have shown, 
the transfer of dead circulating capital to the fixed form 
is the cause of an additional amount of dead circulating 
capital being also transferred to the fund of active circu- 
lating capital, and that it is true in this sense is an impor- 
tant verification of the principles here advanced. 

The immediate effect of the creation of fixed capital 
in sustaining profits by its depletion of dead stock might 
seem to be partially counteracted by its withdrawing 
laborers from the production of circulating stock. The 
greater competition for labor resulting, undoubtedly tends 
to raise proportional wages, and would do so were it not 
that the demand for productive and unproductive con- 
sumption remaining the same while the supply of com- 



76 CAPITAL AND POPULATION. 

modities to be consumed being, bj the supposition, de- 
creased, the relative vakie of labor is lowered as compared 
with other commodities, fixed capital excepted. 

The case is the same when previously unemployed 
labor is used in the creation of fixed capital ; this necessi- 
tates an increase in the demand for productive and unpro- 
ductive consumption together, while there is no increase 
in the supply of commodities to be consumed. This can 
only result in a fall in proportional wages and increase of 
the rate of profit. This is what always occurs during the 
periods when fixed capital is being created, as, even when 
it diverts labor from other production, other production 
utilizes the unemployed labor of the community. As 

\ the process, however, causes a constant decline in the 
relative value of fixed capital, such periods of inflated 

? prosperity and activity are soon brought to an end by the 
creation of fixed property ceasing to be profitable. 'H^ 
// I 



CHAPTER Y. 



PANICS. 



That tlie current explanations of panics are not very 
satisfactory, will be conceded by most students of our 
science. We have seen already that a conclusive test 
exists, and can be applied, to disprove the most common 
and popular one advanced, viz., that they are due to the 
depletion of capital resulting from the waste and extrava- 
gance of the prosperous times that precede them. The 
popular apprehension of the subject is that they are 
mainly due to this cause, and the mass of their readers 
peruse with approval the diatribes of our newspaper 
economists, denouncing expenditure both public and 
private. Such readers are very sure that, individually, 
they increase their incomes through saving, and lessen 
them through spending ; and it is naturally hard for 
them to understand why the same is not true of them- 
selves collectively. 

Economists, however, being somewhat more given to 
verifying theory by fact, have, to a very considerable 
extent, recognized that the seasons of " waste and ex- 
travagance^" being also those of great productive effi- 
ciency, are, despite the large expenditure, the seasons in 
which alone the community saves and adds to its wealth. 
Accepting the authority of Mill and Eicardo, that in- 



78 ^ CAPITAL AND POPULATION". 

crease of wealth must lead to an increase of the wages- 
fund and of production, they recognize the discrepancy 
of theory and fact, and attempt to account for it mainly 
by an endeavor to explain away the fact. They say that 
it is not wealth, but only a part of wealth, that employs 
labor, and that the decrease of employment is due to the 
depletion of such part (circulating capital) by a diversion 
of the funds, that should have flowed into it, to permanent 
investment (fixed capital). But we have already seen that 
this explanation is the reverse of true, as not the whole 
of circulating capital, but only a part of it, employs labor, 
and that such part is not only relatively but absolutely 
the smaller, population remaining the same, when circu- 
lating capital in gross is the greatest ; and we have also 
seen that the creation of fixed capital, by decreasing dead 
stock, always tends to a corresjjonding increase, of the 
active stock of circulating capital, or of the wages-fund. 
It must, therefore, be acknowledged that, on the occur- 
rence of a crisis, the funds ])hysicalhj avcdloMe for the 
employment of labor, and the material wealth of the com- 
munity in every form, are greater than at other times. 

Mill himself is wiser than his followers. Confused 
though he was by his ambiguous use of the term '^ capital," 
he nevertheless perceived that accumulations were great- 
est just before a crisis, but, deceived by his erroneous 
use of the term " market," he was unwilling to acknowl- 
edge, in .apparent contradiction to Say, that accumulation 
tended to prevent exchanges ; and he attempts to explain 
crises as referable solely to the action of the credit sys- 
tem. In Book III, chapter xiv, section 4, he says : 

" But it is a great error to suppose, with Sismondi, that a com- 
mercial crisis is the effect of a general excess of production." (It 
is excess of accumulation, not of production, contended against in 

/ 



PAOTOS. 79 

this treatise, and practically contended for by Mill.) "It is simply 
the consequence of an excess of speculative purchases. It is not a 
gradual advent of low prices, but a sudden recoil from prices ex- 
travagantly high. Its immediate cause is a contraction of credit, 
and the remedy is not a diminution of supply^ but the restoration 
of confidence." 

Notliing could be more unequivocal than this, and 
nothing could be more in contradiction to it than the 
following passage in Book lY, chapter iv, sections 5 
and 6 : 

" What, then, are these counteracting circumstances, which, in 
the existing state of things, maintain a tolerably equal struggle 
against the dovrnward tendency of profits, and prevent the great 
annual savings which take place in this country from depressing 
the rate of profit much nearer to that lowest point to which it is 
always tending, and which, left to itself, it would so promptly at- 
tain ? The resisting agencies are of several kinds. 

" First among them we may notice one which is so simple and 
so conspicuous that some political economists, especially M. de 
Sismondi and Dr. Chalmers, have attended to it almost to the 
exclusion of all others. This is, the waste of capital in periods of 
overtrading and rash speculation, and in the commercial revulsions 
by which such times are always followed. It is true that a great 
part of what is lost at such periods is not destroyed, but merely 
transferred, like a gambler's losses, to more successful speculators, i 
But even of these mere transfers a large portion is always to 
foreigners, by the hasty purchase of unusual quantities of foreign; 
goods at advanced prices. And much also is absolutely wasted.. 
Mines are opened, railways or bridges made, and many other works ', 
of uncertain profit commenced, and in these enterprises much capi- r 
tal is sunk which yields either no return, or none adequate to the 
outlay. Factories are built and machinery erected beyond what 
the market requires, or can keep in employment. Even if they are . 
kept in employment, the capital is no less sunk ; it has been con- ', 
verted from circulating into fixed capital, and has ceased to have ' 
any influence on wages or profits." (We have seen that Mill is 
.mistaken in assuming that the amount of fixed capital has no influ- 



80 CAPITAL AND POPULATION. 

ence on wages.) ^'•Besides this, there is a great unproducti'ce eon- 
sumption of capital, during the stagnation which folloios a period of 
general overtrading. Estallishments are shut up, or Tcept icorTcing 
without any profit, hands are discharged, and numbers of persons in 
all ranlcs, leing deprived of their income, and thrown for support on 
their savings, find themselves, after the crisis has passed away, in 
a condition of more or less impoverishment. Such are the effects of 
a commercial revulsion : and that such revulsions are almost peri- 
odical is a consequence of the very tendency of profits ichich we are 
considering. By the time a few years have passed over without a 
crisis, so much additional capital has been accumulated that it is no 
longer possible to invest it at the accustomed profit : all public secu- 
rities rise to a high price, the rate of interest on the best mercan- 
tile security falls very low, and the complaint is general among 
persons in business that no money is to be made. Does not this 
demonstrate how speedily profit would be at the minimum, and the 
stationary condition of capital would be attained, if these accumu- 
lations went on without any counteracting principle j But the 
diminishedVcale of all safe gains inclines persons to give a ready 
ear to any projects which hold out, though at the risk of loss, the 
hope of a higher rate of profit ; and speculations ensue, which, with 
the subsequent revulsions, destroy or transfer to foreigners a con- 
siderable amount of capital, produce a temporary rise of interest 
and profit, make room for fresh accumulations, and the same round 
is recommenced. 

" This, doubtless, is one considerable cause which arrests profits 
in their descent to the minimum, by sweeping away, from time to 
time, a part of the accumulated mass by which they are forced 
down. But this is not, as might be inferred from the language of 
some writers, the principal cause. If it were, the capital of the 
country would not increase ; but in England It does increase greatly 
and rapidly. This is shown by the increasing productiveness of 
almost all taxes, by the continual growth of all the signs of national 
wealth, and by the rapid increase of population, while the condi- 
tion of the laborers is certainly not declining, but, on the whole, 
improving. These things prove that each commercial revulsion, 
however disastrous, is very far from destroying all the capital which 
has been added to the accumulations of the country since the last 
revulsion preceding it, and that invariably room is either found or 



PANICS. 81 

made for the proiitable employment of a perpetually increasing 
capital, consistently with not forcing down profits to a lower 
rate. 

" This brings us to the second of the counter-agencies, namely, 
improvements in production. These evidently have the effect of 
extending what Mr. "Wakefield terms the field of employment, that 
is, they enable a greater amount of capital to be accumulated and 
employed without depressing the rate of profit — provided always 
that they do not raise to a proportional extent the habits and re- 
quirements of the laborer. 

" If the laboring class gain the full advantage of the increased 
cheapness — in other words, if money-wages do not fall — profits are 
not raised, nor their fall retarded. But if the laborers people up to 
the improvement of their condition, and so relapse to their previous 
state, profits will rise. All inventions which cheapen any of the 
things consumed by the laborers, unless their requirements are 
raised in an equivalent degree, in time lower money-wages ; and, by 
doing so, enable a greater capital to be accumulated and employed 
before profits fall back to what they were previously." 

When Mill says that " the remedy is not a diminution 
of supply," he is right, if by remedy he means preven- 
tion. The evil has not been caused by any excess of 
production, but by the non-utihzation, in either productive 
or unproductive consumption, of too great a portion of 
what has been produced. If he means that it is not the 
proper remedy after the crisis has occurred, he is right 
only if he means to advocate, which he is far from doing, 
the absolute destruction or unproductive consumption of 
excessive dead stock. But, as this will seldom take place 
naturally, the diminution of supply, undesirable as it is, 
is the only remedy the undisturbed action of economic 
law supplies, and the sole means by which the readjust- 
ment of capital to population is in practice eifected. 
There is too self-evident an appeal to facts for this to be 
denied, nor does Mill deny it, contradictory as it is to his 



82 CAPITAL AND POPULATION. 

assertion, but explicitly asserts it in the passage wliicli I 
have italicized in the last quotation. 

But I further assert that credit is never a cause of 
crises at all, but only an accelerating influence, by which 
I mean that, as prices would then be stationary or nearly 
so, a crisis could never occur from any extension of credit 
not accompanied by over-accumulation ; while the latter 
would periodically produce seasons of industrial inactivity, 
even if business were conducted on a strictly cash basis. 
In saying this, I, of conrse, do not mean to assert that 
credit is without influence. Its influence is undeniably 
great, and the larger part of the losses society sustains 
through its enforced periods of industrial inactivity must 
be attributed to it. All that I contend for is, that it 
must be considered only as intensifying effects due to 
over-accumulation, and that would not occur at all with- 
out over-accumulation. 

Gold and silver, leaving out of view their use as com- 
modities, subserve a double purpose. They act as the 
standard of value, and as the medium of exchange. If 
they had never been supplemented by credit, their value 
would be many times greater than it now is. 

" Having now formed a general idea of the modes in which 
credit is made available as a substitute for money, we have to con- 
sider in what manner the use of these substitutes affects the value 
of money, or, what is equivalent, the prices of commodities. It is 
hardly necessary to say that the permanent value of money — the 
natural and average prices of commodities — are not in question here. 
These are determined by the cost of producing or of obtaining the 
precious metals. An ounce of gold or silver will, in the long run, 
exchange for as much of every other commodity as can be produced 
or imported at the same cost with itself; and an order or note of 
hand, or bill payable at sight, for an ounce of gold, while the credit 
of the giver is unimpaired, is worth neither more nor less than the 
gold itseH." — (Mill, Book III, chapter xii, section 1.) 



/ J^evertlieless, credit does permanently affect the value 

of geld, ..hecaiise it affects the amount needed. Every 
time (other things remaining the same) credit supplies the 
function of gold in exchange, it depresses its value. If 
the value sinks below the cost of production, the value of 
gold is not thereby eventually raised, but the cost of pro- 
j duction is itself^lowered by the abandonment of some of 
tlie poorer mines. If credit did not exist, we should have 
more gold and silver, and they would be of greater value. 
While their production would have been greatly stimu- 
lated, and while we would possess several times the 
amount we do now, the money prices of other articles 
would be but a small fraction of what they are now. The 
^troduction of credit has rendered unnecessary a great 
amount of labor that would otherwise have been expended 
in their production, and has saved a very considerable 
loss that would have occurred through their greater de- 
struction by accident and wear. It has also yielded a 
further gain in the convenience, or lessened labor, by , 
means of which exchanges are effected. 

What concerns us more nearly, however, is the effect 
of credit upon prices, and through them upon production, 
consumption, and accumulation. Credit, no matter what 
its form, does not increase capital, but it does increase 
the availability or effectiveness of capital. It facilitates 
exchange, stimulates production, and places the existent 
capital in the hands of those most disposed to make in- 
vestments — thus leading to a more rapid accumulation. 
But, in the end, supposing the same state of civilization 
to be reached without it as with it, it decreases the pos- 
sible accumulation of capital, both because of the smaller 
amounts of the precious metals that the community will 
accumulate, and because a smaller amount of more avail- 



84: CAPITAL AKD POPULATION. 

able capital will suffice for the needs of production — that 
is, under the credit system — as capital will^lSe more ac- 
tive, a smaller amount will be needed; and the normal 
ratio of capital to population will be lessened*. Besides 
the economies already noticed, the credit system confers 
a benefit upon society in that lt"lessens' the relative^ 
amount of savings and investments that the growing_^ 
needs of society demand. 

If gold and silver were our only mediums of exchange, 
\ the fluctuations in prices, that depend upon their relative 
amount, would be greater than they now are. Any in- 
creased demand upon them as mediums of exchange may 
now be partly met by an extension of credit, or an im- 
^ provement in its methods which may carry the com- 
' munity over the period of their relative scarcity without 
much depressing prices. The production of the precious 
metals is very variable in amount, but the effect of their 
greater or less production upon prices is largely modified 
by the credit system, because it now performs the greater 
portion of their functions, and in so doing possesses an 
, elasticity which specie does not, because the latter can 
/ only increase in its amount, when the demand for it is 
^ great, through importation of the precious metals or by 
I the slow process of greater activity in mining, whereas 
: credit expands of itself with every fresh demand upon it 
I as a medium of exchange, without much affecting prices. 
'^ The fiuctuations in prices, that depend upon the greater 
or less activity of exchanges, would be much ^eis- if we 
had no system of credit. The demand upon^old and 
silver, if we depended upon them alone, resulting from 
any increase of prices or unusual activity of exchanges 
would be immediately felt, and the value of the precious 
metals relative to other commodities increased, which Js 



PANICS. 85 

to say tliat the prices of other commodities would soon 
fall, and the activity of exchanges be checked ; whereas 
under the credit system the increase of credit that always 
accompanies an increase in the activity of exchanges 
helps to sustain prices. As the fluctuations that depend 
upon the activity of exchanges are vastly more numerous 
than those depending upon the abundance or scarcity of 
the precious metals, it is evident that fluctuations are very 
much m^or©- frequent, sudden, and greater in amount, 
under the~credit system. 

While it allows greater latitude for fluctuation in 
prices, any extension of credit, no matter what its form 
— whether it be an increase of currency, an extension of 
bank credits, or the greater facility with which time-pur- 
chases are made — raises the prices of all commodities, not 
only by the creation of a greater demand, but by its dis- 
turbance of the ratio of the amount of the commodities 
to the amount of their medium of exchange. That is to 
say, the increase of credit tends to raise prices by depre- 
ciating the value of the medium through which commod- 
ities are exchanged, and also to raise them through the 
stimulation of demand that results from the additional 
facility it gives to exchange and production. 

Any rise in prices is primarily and mainly a benefit 
to the capitalist, who possesses the commodity enhanced 
in value. It is a profit to him additional to the legitimate 
return for the use of capital he was before receiving for 
producing or transferring that commodity. Such profit 
represents no gain of any kind to the community, but 
only a transfer from the pocket of the consumer to the 
pocket of the capitalist exactly equal to the increase in 
the price of the commodity. A general rise in prices 
simply means that capital receives a larger, and labor a / 



86 CAPITAL AND POPULATION, 

smaller, proportion of the total production, than they were 
receiving before it took place. As such rise always stim- 
nlates production, the amount to be divided is greater, 
and the absolute share of the laborers may be, and usu- 
all}^ is, larger than before ; but their relative share is less. 
Capital receives the larger share of the benefit of the in- 
creased activity. 

We see, therefore, that the effect of the credit system, 
when it commences to act upon a normal ratio of capital 
to population, is to stimulate prices and increase profits, 
and to hasten the over-accumnlations that are inevitably 
made from excessive profits, and which necessitate a fol- 
lowing period of inactivity and decline. 

But it has a further "effect. Not only does the credit 
system shorten the rhythm of activity and idleness, but it 
renders the fluctuations more variable in their effect npon 
individuals. If every article were paid for by its purchaser 
at the moment of purchase, the benefits of a general rise 
in prices wonld be distributed among all the holders of 
property, each of whom would gain a slight increase of 
wealth ; but, when the articles enhanced in value have 
certain fixed claims against them, the proportional benefit 
to their possessors is thereby increased. A rise in price 
of ten per cent gives an extra profit of ten per cent on 
articles fnlly paid for ; but if half the purchase-money is 
yet dne, the profit is twenty per cent on the possessor's 
real interest in them. "When credits are very much ex- 
tended, a rise in prices, instead of making small additions 
to many incomes, makes larger additions to fewer incomes. 
The larger sudden additions to incomes are, the larger will 
be the proportion of them that will be invested, and the 
smaller will be the increase of expenditure. Thus, again, 
we find that credit hastens over-accumulation. 



PAmcs. 87 

Having now readied the top of the wave, we will fol- 
low it over the crest to its decline. Higher prices can 
only be maintained when they are the result of perma- 
nent canses, and such causes must not only be permanent 
but world-wide. There are such causes, and they can all 
be resolved into the permanent increase of the proportion 
which the medium of exchange, whether gold or credit, 
bears to the amount of commodities seeking exchange. 
The world has experienced such an increase for several 
centuries and still continues to experience it. It has 
been, and is, both a cause and result of advancing civili- 
zation. But any permanent advance in prices must not 
only proceed from permanent causes, but from causes that 
equally affect those portions of the civilized world that 
exchange any considerable proportion of their production 
with others. "When any single nation, by increasing its 
medium of exchange, or from any other cause, raises the 
money prices of its commodities more than its neighbors, 
it immediately places itself at a disadvantage as compared 
with them ; and they are enabled to undersell it in both 
its own and foreign markets. The productions of a na- 
tion so situated must accumulate within its own borders. 
It will also accumulate foreign productions, which will 
commence to occupy its home market. Such a nation is 
finally forced to reduce its production. Until it does so 
its imports will exceed its exports ; or, in other words, it 
will borrow of other nations, and must pay a portion of 
its income to them as interest. If it does not pay the 
balance due, in gold and silver, and its creditors do not 
choose to make a permanent investment of their advances, 
the rate of exchange, or the equation of international de- 
mand, will be against it, which again places it at a com- 
mercial disadvantage. If they do permanently invest 



88 CAPITAL AND POPULATIOIT. 

sucli advances, foreign capital is brought into competition 
with home capital at the very time that excessive profits 
and investments have made capital superabundant. The 
only escape from the inevitable result of this state of 
things is the general reduction of prices. The higher 
and more rapid their rise has been, the lower and more 
sudden their fall must be. 

But this fall is no more a loss to the community than 
their rise was a gain. The property of the community 
is exactly what it was when every one was apparently 
wealthy. Like the rise, the decline is a mere transfer of 
values ; but now it is the consumer who gains, and the 
capitalist who loses. The only loss to the nation is on 
the relatively small portion of the production it exports, 
as its gain in the rise was also on its exports. This loss 
is trivial, and is balanced by a previous fictitious gain. 
ItM^ The real injury to the community is the very serious loss 
of its labor, forced to be idle during the period of depres- 
sion. 

The effect of credit on this transfer of value is to dis- 
tribute the loss in a manner very dififerent from its natu- 
ral proportions. If there were no indebtedness, the losses 
consequent upon the fall in prices w^ould be distributed 
pro rata among all the possessors of commodities. But 
if, as before supposed, these possessors were indebted for 
half the purchase value of their goods, the loss to them 
is doubled, while the lenders lose nothing unless the de- 
cline is so great as to invalidate their security. 

If this loss were distributed as evenly as it would be 
if the credit system did not exist, it would cause little 
suffering and no alarm, because no one could become in- 
solvent. The worst that any would suffer, would be a 
slight reduction of capital and income, to which they 



PANICS. 89 

could readily adjust tlieir affairs. But the loss being con- 
centrated upon a few, who are indebted in certain fixed 
sums, it renders so many of them insolvent, that lenders, 
becoming alarmed for the adequacy of their security, 
contract credits as much and as suddenly as they possibly 
can. ]^ow, this process not only forces a further decline 
in prices, by stopping all the demand that proceeds from 
investment, but also by forcing holders of property to 
sell at any price, in order to obtain means for the repay- 
ment of indebtedness for which they can no longer ob- 
tain credit. It also forces prices down, by lessening the 
proportion of the medium of exchange to the amount of 
commodities seeking exchange. The fearful disturbance 
of the social organism that the severity of this jjrocess 
causes has been too vividly experienced by us all to need 
further elucidation. We have merely to remark that the 
effect of the credit system is to depress prices in a time 
of depression more than they otherwise would be, as well 
as to raise them in times of prosperity higher than they j 
would otherwise go. ^Neither their rise nor fall is a gain ' 
or a loss to the community; but the widening of the 
fluctuations is an evil, in that it increases the idleness, or 
loss of labor, which is the real and only injury that panics 
cause. 

But prices in any nation can no more be kept perma- 1 
nently below prices in other nations than they can be kept 1 
above them ; nor can they long be kept at a j)oint that i 
forbids profit. The loss being merely a transfer from the ^ 
property to the consuming classes, the consuming power of 
the latter, though absolutely less, is, relatively to produc- 
tion, greater than before. Over-accumulations cease — 
profits being too small to allow them to be made. Exports 
once more exceed imports ; the suffering nation, again 



90 CAPITAL AND POPULATION 

able to produce as cheaply as, or cheaper than, its neigh- 
bors, repays its foreign indebtedness, and resumes its con- 
trol of home and foreign markets, and the rate of ex- 
change and the equation of international demand are again 
in its favor. The nation re-enters upon a period of pros- 
perity and advancing prices, in which it proceeds with 
accelerating progress, again to suffer from its economic 
mistake of endeavoring to be richer than economic law 
allows. 

"We are now entitled to state that panics are the sud- 
den and violent readjustment from an abnormal to a 
normal ratio of capital to population. Their cause is 
solely the disturbance of this ratio. The only effect of 
the credit system is to accelerate the rhythm and increase 
the extent of the fluctuations above and below the point 
at which the ratio harmonizes with the present state of 
society. 

If the large profits resulting from a rise in prices were 
expended wholly for productive and unproductive con- 
sumption, and did not result in any increase of " dead 
stock " either fixed or circulating, the rise of price would 
be maintained, for the efficient demand would always 
equal the supply, however great the latter might be, and 
production would continue to be as profitable as before. 
There would be, to be sure, a redistribution of wealth, 
but, as long as the ratio of capital to population was not 
really disturbed, further fluctuations in general prices 
would be only such as would result from false suppositions 
that the ratio was disturbed. As further investments 
would not be made, or, if made, would continue to be 
profitable because their amount would be strictly propor- 
tional to the increase of population, a collapse of credit, 
however extended it might be, could hardly occur, for 



PANICS. 91 

confidence could not be shaken when it was felt that 
dead stock was not in excess. Such a balance of popula- 
tion and capital is of course chimerical. It is too ideal 
a state of society to be hoped for or expected. It is quite 
within the province of reason, however, to show that some 
approximation to it is possible, and that its full attain- 
ment would free us for ever from commercial crises. 

As the result of our investigations, we are also enti- 
tled to state that the benefits we derive from the credit 
system — when the point has been reached in a nation's 
history at which a tendency to over-accumulation begins 
to show itself — can all be resolved into the reduction of 
the proportion which capital normally bears to population ; 
and its evils, into the intensification of the temporary 
fluctuations it causes in the ratio of capital to population. 

The permanent rise in prices which, as before ex- 
plained, we owe to the credit system, may perhaps be con- 
sidered as an exception to this remark. Any permanent 
advance of the point about which prices tend to fluctuate 
prolongs the period of large profits in which it takes place, 
without prolonging the following period of reaction. It 
would seem, therefore, that it must also increase the totality 
of production, and the augmentation of capital such in- 
crease of production demands and justifies. We have 
seen, however, that this is not an advantage, unless the total- 
ity of unproductive consumption is also increased. That 
4t~d6'es this is not so clear, but may still, we think, be assert- 
ed. Increase of production is always attended by some 
increase of consumption ; but the proportion between the 
two is much less disturbed by a gradual than by a sudden 
rise of prices. A sudden increase of income will yield a 
larger percentage for investment than a gradual one of 
equal extent. The more gradual it is, the closer will the 



92 CAPITAL AND POPULATION". 

increased expenditure approximate to tlie increased in- 
come, and, if it be very gradual, may almost or quite 
equal it. J^Tow, this permanent rise in prices is very 
gradual, having extended over several centuries, and it 
has undoubtedly been wholly utilized in unproductive 
consumption, and not wasted in uncalled-for saving. But, 
if this explanation is the true one, this benefit which we 
derive from credit is analogous to the others, in that it 
results from an increase of unproductive consumption, 
without any more than a corresponding and fit increase of 
capital. 

Our principle has now afforded us a reasonably full 
and accurate explanation of the cause and action of pan- 
ics as affecting individual nations. It might seem, at 
first sight, that, where all nations advanced with nearly 
equal rapidity, and at the same time, toward bigber 
prices and more extended credits, the result would be a 
permanent rise of prices from which no reaction could 
■possibly follow. Steam and electricity are making one 
commercial community of the nations. Economic rela- 
tions are now so intimate and so sensitive, that we may 
hereafter expect that the alternations of activity and stag- 
nation will become more and more uniform, both in ex- 
tent and time, for all communities. As two vibrating 
chords, when brought together, tend to vibrate in unison, 
so the commercial rhythms of separate nations tend to 
uniformity as distances are annihilated. This uniformity 
of rhythm, in proportion as it is perfect, removes the 
restraint upon each other's ioflation of credit and prices 
which has been hitherto exercised. But it never can be 
perfect, and always will allow some portion of the re- 
straining influence to be exerted. Although it may 
lengthen the rhythm of activity and idleness, it can never 



PANICS. 93 

destroy it, but will rather tend to its intensification. We 
may expect these states, when more universal, to be 
longer in their continuance and more extreme in their 
intensity ; but they wdll continue as before in all other 
respects. Their real, indeed their only, cause is over- 
accumulation. The only difference is, that the relief from 
their burden is longer deferred, and more tedious when 
commenced, where the difficulty of distributing the over- 
accumulations among foreign nations is enhanced. This 
can not be done so effectively where all are suffering, in 
nearly equal degree, from the same cause. 

It has hitherto been claimed that a " general glut " 
was impossible ; that the world could not have too much 
of everything. But facts are stubborn things, and some- 
thing very like it has come to pass. A general glut is the j 
result, not, as Mill assumes, of over production, but of | 
over-accumulation ; and we have seen, not only that this i 
is possible, but that the tendency of society toward such 
a state is constant so long as it possesses an undue pro- 
portion of the accumulating class. We have also seen 
that the credit system intensifies the tendency to over- 
accumulation, both in its beneficial effect of lessening the 
necessary proportion of capital to population and in its 
evil tendencies of stimulating the fluctuation of prices, 
and confining the consequent gains and losses to fewer 
individuals without lessening their amount. All these 
causes act over the whole area as certainly and as system- 
atically as over any particular portion. The only differ- 
ence that their universal rhythm makes to any particular 
nation is, that it takes away, to the extent in which it 
occurs, the opportunity of relieving the home markets 
by exporting the surplus which is depressing them, to 
other nations that will not or can not take it when they 



94 CAPITAL AKD POPULATION. 

are oppressed in like degree with a superabundance of 
dead stock. Except as modified by tliis one circumstance, 
the readjustment of capital to population proceeds exactly 
the same when the periods of alternating activity and 
stagnation coincide as when they are independent. The 
cause of panic and depression is not in the least altered 
by the periodical coincidence of industrial activity. De- 
cline in prices and production must follow over-accumula- 
tion, and collapse of credit must follow decline in prices, 
so long as the' consequent transfer of property from the 
capitalist to the consumer is at the expense of a few 
of the capitalists, instead of being distributed jpro rata 
among them. 

The loss of confidence which constitutes the essential 
nature of panic as distinguished from stagnation can only 
result from the anticipation of a decline in prices. But 
a decline in prices can only be effected by a decrease in 
the medium of exchange or an increase in the amount of 
commodities to be exchanged ; the latter cause can only 
result from over-accumulation, and the former from a 
destruction or exportation of the precious metals. The 
fact that in any nation prices are higher than in the rest 
of the world will lead to such exportation, and also if 
speculation at any time should raise prices above the 
level determined by the ratio of commodities to the 
medium of exchange, so that production was yielding 
more than its normal rate of profit, an exportation of 
gold would take place sufiScient to soon reduce prices 
and profits to the normal rate. This fall in prices, when 
anticipated, would cause, undoubtedly, some loss of con- 
fidence, but, if at the time the proportion of capital to 
population was not too large, the rate of profit could not 
fall to a point that would materially decrease production. 



\ 



PAOTCS. 95 

In an isolated nation wliicli neither imported nor export- 
ed gold, general prices would be wholly governed by the 
increase or decrease of capital as compared with popula- 
tion. Speculation would affect particular not general 
prices, and that only temporarily. The amount of pro- 
duction, within certain limits never practically reached, 
would be strictly inverse to the amount of accumulation ; 
and it is hardly conceivable that any disturbance of con- 
fidence and credit, not proceeding from an abnormal 
cause, such as war, could lead to any considerable cessa- 
tion of industry, as long as capital continued barely suf- 
ficient for the needs of population. JSTothing that could 
be dignified with the name of a commercial crisis could 
occur as long as production was sufficiently profitable. 
The world as a whole must be considered as an isolated I 
nation, and no disturbance of credit and confidence can 
therefore be a sufficient cause for a world-wide depres- 
sion. That cause can only be found in general over- ^ 
accumulation. When, therefore, I claimed over-accu- • 
mulation as the sole cause of commercial crises I meant 
general, not national crises. The latter may be brought 
about by the exportation of gold, but can never be very 
severe if the normal ratio of capital to population has not 
been too much disturbed. 

My arguments, if valid, surely supply the only satis- 
factory explanation of commercial crises ever advanced ; 
and that they do so is certainly an im]3ortant verification 
of the deductions made, and entitle them to more con- 
sideration than similar ideas have heretofore received. 
There has been, indeed, much excuse for the neglect and 
even the contempt with which somewhat similar views 
have been regarded, as they have heretofore been pre- 
sented in language, apparently at least, subversive of 



96 CAPITAL AND POPULATION 

many of the best-established results of the science. I 
have labored, I hope not without success, to show that 
thej are really in accord with the ideas and results of 
the best thinkers, and that these themselves, as well as. 
their less able opponents, are not free from confusion 
in their use of terms, and that, when inaccuracies of 
statement and definition are removed, the views of 
those on both sides of the dispute are seen to coincide 
with results, as we shall see later on, in the practical ap- 
plication of the science, as well as in its theories, contem- 
plated by neither. 



CHAPTEE YI. 

CREDIT. 

Although not so strictly in the line of onr argiimentj 
some criticisms upon Mill's view of credit will be advis- 
able, as bis accuracy of statement and clearness of percep- 
tion on tbe subject have been somewhat impaired by his 
ambiguous conception of what constitutes the loanable 
fund. 

In Book II, chapter xv, section 4, he says : 

" There is scarcely any dealer or producer on a considerable 
scale, wlio confines Lis business to what can be carried on by his 
own funds. When trade is good, he not only uses to the utmost his 
own capital, but employs in addition much of the credit which that 
capital obtains for him. When, either from over-supply or from 
some slackening in the demand for his commodity, he finds that it 
sells more slowly or obtains a lower price, he contracts his opera- 
tions, and does not apply to bankers or other money-dealers for a 
renewal of their advances to the same extent as before. A business 
which is increasing holds out, on the contrary, a prospect of profit- 
able employment for a larger amount of this floating capital than 
previously, and those engaged in it become applicants to the money- 
dealers for larger advances, which, from their improving circum- 
stances, they have no difficulty in obtaining. A different distribu- 
tion of floating capital between two employments has as much effect 
in restoring their profits to an equilibrium as if the owners of an 
equal amount of capital were to abandon the one trade and carry 
their capital into the other. This easy, and as it were spontaneous, 



98 CAPITAL AND POPULATION. 

method of accommodating production to demand is quite sufficient 
to correct any inequalities arising from the fluctuations of trade, or 
other causes of ordinary occurrence." 

If Mill liad been a merchant, he could hardly have 
failed to see that the process he here explains is not 
what reallj occurs. 

When goods accumulate, and trade becomes poor, the 
demand for loans increases, they being evidently needed 
by the producer to enable him "to carry" his goods; or, 
if he has parted with them to a speculator or jobber, they 
will need loans to the same extent, except as they employ 
their own capital for the purpose ; but this is equivalent 
to the other, as thereby the same amount of funds is 
removed from the loan market. The number of discounts 
in such times will be less, because that depends largely 
upon the activity of exchange, which is then much re- 
duced ; but the amount on loan, or withdrawn from the 
loan market to carry unsalable goods, will be larger than 
ever, and will be greater in those trades in which the 
greatest accumulations have taken place and which are 
consequently the dullest. When, on the contrary, any 
particular trade is brisk, the amount that will be loaned 
to it, for the purpose of carrying its dead stock, will be 
small. When, however, the profits of any trade are so 
large as to lead to new investments of fixed capital in it, 
its demand for loans will increase, both because to some 
extent such investments will be made from borrowed 
funds, and because, when made by those belonging to 
the owners, they remove an equivalent amount of funds 
from the loan market. An active trade demands more 
active stock but less dead stock than a depressed one, and 
usually, indeed, we may say always, depends less for its 
circulating capital upon the loan market. In active times. 



CREDIT. 99 

the decrease in the demand for loans to carry dead stock 
is greater than the increase of loans to be employed pro- 
ductively, and any increase in the amount on loan must 
be attributed to the demand for purposes of fixed invest- 
ment ; except, indeed, shortly before a crisis occurs, when, 
the amount of dead stock having greatly increased and 
nearly reached its limit, large loans will also be needed 
to carry it. In active times, therefore, a great increase 
of the amount on loan is a sign that accumulation is 
rapidly approaching its limit, and that a reaction may 
soon be expected. 

In Book III, chapter xxiii, section 3, Mill says : 

"I have, thus far, considered loans, and the rate of interest, as a 
matter which concerns capital in general, in direct opposition to the 
popular notion, according to which it only concerns money. In 
loans, as in all other money transactions, I have regarded the money 
which passes, only as the medium, and commodities as the thing 
really transferred — the real subject of the transaction. And this is, 
in the main, correct ; because the purpose for which, in the ordinary 
course of affairs, money is borrowed, is to acquire a purchasing 
power over commodities. In an industrious and commercial coun- 
try, the ulterior intention commonly is, to employ the commodities 
as capital ; but even in the case of loans for unproductive consump- 
tion, as those of spendthrifts, or of the government, the amount 
borrowed is taken from a previous accumulation, which would oth- 
erwise have been lent to carry on productive industry; it is, there- 
fore, so much subtracted from what may correctly be called the 
amount of loanable capital. 

" There is, however, a not unfrequent case, in which the purpose 
of the borrower is different from what I have here supposed. He 
may borrow money, neither to employ it as capital nor to spend it- 
unproductively, but to pay a previous debt. In this case, what he 
wants is not purchasing power, but legal tender, or something 
which a creditor will accept as equivalent to it. His need is specific- 
ally for money, not for commodities or capital. It is the demand 
arising from this cause which produces almost all the great and 



L.pfC. 



100 CAPITAL AND POPULATIOK 

sudden variations of the rate of interest. SucTi a demand forms one 
of the earliest features of a commercial crisis. At such a period, 
many persons in business, who have contracted engagements, have 
been prevented by a change of circumstances from obtaining in 
time the means on which they calculated for fulfiUing them. These 
means they must obtain at any sacrifice, or submit to bankruptcy; 
and what they must have is money. Other capital, however much 
of it they may possess, can not answer the purpose unless money 
can first be obtained for it; while, on the contrary, without any 
increase of the capital of the country, a mere increase of circulating 
instruments of credit (be they of as little worth for any other pur- 
pose as the box of one-pound notes discovered in the vaults of the 
Bank of England during the panic of 1825) will effectually serve 
their turn, if only they are allowed to make use of it. An increased 
issue of notesj in the form of loans, is all that is required to satisfy 
the demand, and put an end to the accompanying panic. But, al- 
though in this case it is not capital or purchasing power that the 
borrower needs, but money as money, it is not only money that is 
transferred to him. The money carries its purchasing power with 
it wherever it goes ; and money thrown into the loan market really 
does, through its purchasing powder, turn over an increased portion 
of the capital of the country into the direction of loans. Though 
money alone was wanted, capital passes; and it may still be said 
with truth that it is by an addition to loanable capital that the rise 
of the rate of interest is met and corrected. 

" Independently of this, however, there is a real relation, which 
it is indispensable to recognize, between loans and money. Loan- 
able capital is all of it in the form of money. Capital destined di- 
rectly for production exists in many forms ; but capital must always 
be such as to adjust these two amounts to one another.* But while 

* I do not include in the general loan-fund of the country the capitals, 
large as they sometimes are, which are habitually employed in speculatively 
buying and selling the public funds and other securities. It is true that all 
who buy securities add, for the time, to the general amount of money on 
loan, and lower, to that extent, the rate of interest. But as the persons I 
speak of buy only to sell again at a higher price, they are alternately in the 
position of lenders and borrowers : their operations raise the rate of inter- 
est at one time, exactly as much as they lower it at another. Like all per- 
sons who buy and sell on speculation, their function is to equalize, not to 



CREDIT. 101 

the whole of this mass of lent capital takes effect upon the perma- 
nent rate of interest, the fluctuations depend almost entirely upon 
the portion which is in the hands of bankers ; for it is that portion 
almost exclusively which, being lent for short times only, is contin- 
ually in the market seeking an investment. The capital of those 
who live on the interest of their own fortunes has generally sought 
and found some fixed investment, such as the public funds, mort- , 
gages, or the bonds of public companies, which investment, except l 
under peculiar temptations or necessities, is not changed. | 

" Fluctuations in the rate of interest arise from variations either 
in demand for loans or in the supply. The supply is liable to vari- 
ation, though less so than the demand. The willingness to lend is 
greater than usual at the commencement of a period of speculation, 
and much less than usual during the revulsion which follows. In 
speculative times money-lenders, as well as other people, are in- 
clined to extend their business by stretching their credit ; they lend 
more than usual (just as other classes of dealers and producers em- 
ploy more than usual) of capital which does not belong to them. 
Accordingly, these are the times when the rate of interest is low ; 
though for this, too (as we shall hereafter see), there are other 
causes. During the revulsion, on the contrary, interest always rises 
inordinately, because, while there is a most pressing need on the 
part of many persons to borrow, there is a general disinclination to 
lend. This disinclination, when at its extreme point, is called a 
panic. It occurs when a succession of unexpected failures has cre- 
ated, in the mercantile, and sometimes also in the non-mercantile, 
public, a general distrust in each other's solvency ; disposing every 
one not only to refuse fresh credit, except on very onerous terms, 
but to call in, if possible, all credit which he has already given. De- 
posits are withdrawn from banks ; notes are returned on the issuers 
in exchange for specie; bankers raise their rate of discount, and 
withhold their customary advances ; merchants refuse to renew 
mercantile bills. At such times the most calamitous consequences 
were formerly experienced, from the attempt of the law to prevent 
more than a certain limited rate of interest from being given or 



raise or lower the value of the commodity. When they speculate prudent- 
ly, they temper the fluctuations of price ; when imprudently, they often ag- 
gravate them. 



102 CAPITAL AND POPULATION. 

taken. Persons wlio could not borrow at five per cent had to pay, 
not six or seven, but ten or fifteen per cent, to compensate the lender 
for risking the penalties of the law ; or had to sell securities or 
goods for ready money at a still greater sacrifice. 

" In the intervals between commercial crises there is usually a 
tendency in the rate of interest to a progressive decline, from the 
gradual process of accumulation ; which process, in the great com- 
mercial countries, is sufficiently rapid to account for the almost pe- 
riodical recurrence of these fits of speculation ; since, when a few 
years have elapsed without a crisis, and no new and tempting chan- 
nel for investment has been opened in the mean time, there is always 
found to have occurred in those few years so large an increase of 
capital seeking investment as to have lowered considerably the rate 
of interest, whether indicated by the prices of securities or by the 
rate of discount on bills ; and this diminution of interest tempts the 
possessor to incur hazards in hopes of a more considerable return." 

Mill liaS; apparently, nowhere attempted to ascertain 
what portion of the general fund constitutes the loanable 
fund, but seems to suppose that it is composed of a part 
only of the general fund. It is evident that the loanable 
fund is not composed of money, as its sum is many times 
too large, though Mill seems to imply it by the assertion 
that it is always in the form of money ; as far, indeed, 
as money is concerned, the loanable fund of a community 
is only temporarily diminished by a loan being effected. 
Such loan is very soon deposited by the borrower, and 
there is as much money to lend as before. The amount 
the community carry in their pockets and the amount in 
transit may, indeed, vary somewhat, but such variance is 
trivial in amount, though not in its effects. What, then, 
constitutes the loanable fund? It is evidently the dis- 
posable goods, the capital stock of the community ; but 
what constitutes the demand for loans ? It is as evidently 
the same capital stock that can be given as security. Not 
that all goods form a part of the demand and of the sup- 



CREDIT. 103 

ply of loanable funds, but, when goods form no part of 
the one fund, neither do they of the other. When the 
owner of any commodities is able to carry them without 
borrowing, they form neither a part of such demand nor 
supply ; it is only when he effects their exchange, or, what 
is equivalent to exchange, raises a loan upon them as se- 
curity, that the loan market is affected, and such transac- 
action affects the supply and demand equally. The loan 
market, then, is as purely a case of reciprocal demand as 
the general market for commodities, in which, as Say has 
shown, demand can never exceed supply, or supply de- 
mand. 

By demand for loans I, of course, mean an efficient 
demand. The mere desire to borrow is much great- 
er than the desire to lend without adequate security. 
From personal motives money is sometimes so lent, but, 
when it is, the desire of the borrower by that very cir- 
cumstance has become an efficient demand. What is 
really transferred by a loan is not money, but the use 
of capital — or, rather, the use of material wealth in the 
broadest sense of the term, as the lender may, or may not, 
intend to employ such wealth productively. ^^Tow, it is 
evident that all the wealth of the community can be 
loaned if its owners are willing to loan it, and others are 
willing to borrow it of them ; but when this was effected 
there would be no decrease of loanable funds, for the 
original borrowers could loan it all over again to others, 
if so disposed. 

If by loanable is meant, not, able to be loaned, but, 
what will be loaned, that amount, of course, will be gov- 
erned by the inducements held out by borrowers. What 
those inducements must be will depend mainly upon the 
exchangeable value of the use of capital, i. e., u]3on the 



104 CAPITAL AND POPULATIOlJT. 

rate of profit, in operations similarly situated as to diffi- 
culty and risk. But such inducement, to be an effect- 
ual one, will not have to be at all enhanced on account 
of any increase in the amount of loans made, except 
as such increase enhances the risk of lending. The 
amount of commodities that can be lent is exactly the 
same, after they are loaned, as before. We are justi- 
fied in considering the loan of money as a purchase, 
and its repayment as a repurchase, of the commodities 
which form the security, and interest as the profit that 
accrues on the transaction, and, if it is less or more 
than other profits, it will only be because it entails less 
or more of risk, trouble, and skill. Independent of 
these, interest will follow the same law as profits, be- 
cause it really is a profit. 

But there is one radical distinction between profits 
and interest. Profits rise when prices rise or when 
money-wages fall, and fall when prices fall and money- 
wao-es rise. But a fall in prices is the same as a rise in 
the value of money. The profit of owning or lending 
money, therefore, the rate of interest remaining constant, 
rises when prices are declining, and falls when prices 
rise. Interest may be very low and the gross profit of 
owning obligations due in money may be very great. On 
the other hand, when prices are advancing, the gross 
profit is less than the interest, because the value of the 
principal, when it is returned, will be less. Interest is 
only equivalent to profit in cases where prices remain 
uniform during the life of the loan. "When prices are 
declining, therefore, the borrowing producer will be will- 
ing to pay a very small interest, because he expects to be 
obliged to repay to the lender a greater value than he re- 
ceived from him, and the lender will be willing to receive 



CEEDIT. 105 

a very small rate, as lie expects to receive in repayment 
a greater value than he parted with. But, if he expects 
prices to decline, a mere speculator will not pay even a 
small rate of interest, because in such case, as he is not 
a producer, there will be no profit at all for it to be sub- 
tracted from, but a loss to be added to the interest he 
pays. We see, therefore, that it is utterly impossible for 
a large accumulation of wealth of itself to lead to any 
speculation. If prices have, indeed, declined too far, 
some advance in them may be looked for, but, as long 
as stocks continue large, every one knows that it can be 
but a moderate one, and no great speculation can ensue. 
That is a luxury that the community only indulges in 
when there is apprehension of a scarcity. Mill's explana- 
tion of panics, as due to the speculation engendered by a 
low rate of profit and the accumulation of capital for 
which no legitimate avenues of investment are open, is 
not only inadequate, but diametrically opposed to what 
really occurs. When commodities are scarce, speculation 
really sets in. There are always in the community 
shrewd individuals who perceive that a scarcity is immi- 
nent, and buy for a rise before prices are affected, or fully 
affected, and they are the better enabled to do this be- 
cause, their speculations being more or less closely con- 
fined to the commodities in which they are accustomed 
to deal, they have better means of information than others 
as to the quantity of them in existence. It will soon be 
found, however, after a period of low profits and prices, 
that other articles are also scarce, and speculation will be- 
come more and more general, and price-s will advance all 
along the line. 

But such speculative purchases will not at all affect 
the proportional amount of loanable funds to the demand 



106 CAPITAL AND POPULATION 

for them, thoiigh thej will very much increase the num- 
ber of exchanges of property and the number of discounts' 
that will be called for. They have a powerful effect in 
increasing the amount of productive consumption, as they 
relieve the producing classes of the dead stock they were 
carrying, and supply them with money or the right to 
demand money, from which alone the w^ages-fund can be 
supplied. Before they were so relieved, the producers 
were forced into the loan market, pledging their goods to 
avoid the necessity of overpressing the sales of their 
dead stock. The speculators merely take their place as 
borrowers, and do not even increase the activity of the 
loan market, except as they purchase and repurchase of 
each other. 

When the crisis has come and prices begin to tumble, 
the high rate of interest likewise is no proof of the scar- 
city of loanable funds in proportion to the demand. It 
is caused by the greater supposed risk then incurred in 
lending, and the anxiety of bankers to retain more than 
their proportion of the reserve, and is really somewhat 
mitigated by the expectation of a decline in general 
prices. 

What, then, does determine the average rate of inter- 
est ? We may answer that it will be such percentage of 
the j)rincipal as, together with an addition for any ex- 
pected fall, or with a subtraction for any expected rise in 
general prices, will equal the average rate of profit of 
other capital similarly circumstanced as to risk, trouble, 
and skilL While the average rates of interest and profit 
bear a constant ratio to each other, the rates that prevail 
at any particular time do not do so, but may vary almost 
indefinitely, and the one affords but a slight indication of 
what the other is. The only law that we can affirm is, 



CREDIT. 107 

that during dull times the rate of interest tends to be 
lower than the rate of profit, and during good times, 
when prices are advancing, higher, except as affected bj 
the risk involved. 

To illustrate our meaning, which is, perhaps, as yet 
obscure to the reader, let us suppose five capitalists — M, 
B, W, R, and F — whom we will consider to represent 
five separate classes, and to constitute, with the laborers, 
a community by themselves. Let M be a manufacturer ; 
B, a banker ; W, a wholesaler or jobber ; B, a retailer ; 
and F, a farmer. Let us further suppose them all to be 
possessed of an equal amount of circulating capital : M's 
will consist of manufactured foods and F's of raw prod- 
ucts and food, while Ws and R's will be composed partly 
of goods and partly of food and raw products, and B's 
will be money. 

]N^ow, in a state of barter, M and F would exchange 
with each other directly, or indirectly through W and B, 
and B's capital would lie idle. Under a cash system, B's 
capital would come into play. He w^ould, at first, be the 
only purchaser, and would buy, as the humor took him, 
indifferently from the other four ; but he could only pur- 
chase for unproductive consumption, and would finally 
be eliminated from the problem. Under the credit sys- 
tem, he would, however, be able to obtain a profit for his 
capital. M and F are both desirous of disposing of their 
stock, but neither wants the goods of the other, nor those 
of W and B. What they do want is money with which 
to pay wages and continue their productive consumption. 
W and B desire to dispose of their goods and buy those 
of M and F, but can not do so unless they can get the 
money. W, therefore, goes to B, and pledges his capital 
for money, with which he buys M's goods, who imme- 



108 CAPITAL AND POPULATION". 

diatelj deposits the money with B, or W gives M his 
note for his goods, which B discounts for M, who pays it 
out in wages, and the laborers expend the same sum with 
R, who deposits it with B ; or if M's goods do not suit 
W, or if M prefers to hold them, M goes direct to B and 
obtains the money he needs for wages by pledging his 
goods to him, and this money soon returns to B through 
R or W or F. 'Now we will suppose W desirous of also 
buying F's goods. He can do as he did with M, for B 
has the whole of his original capital to lend him, and he 
can give security upon the goods that formerly belonged 
to M. E"ow we will suppose a second M and a second F, 
with like capital and goods to the first, and W is still able 
to buy their goods, because B is still able to lend him the 
funds. However great the increase of M's and F's, the 
original Ws, R's, and B's could take care of their trade, 
provided no change in prices occurred, and the money 
withdrawn by one party were immediately returned to B 
by another ; and, if we suppose B to possess enough more 
capital than the others to provide for such contingencies, 
the last condition can be eliminated. I^ow, if by increase 
of loanable funds Mill means an increase of gold or other 
money, he is undoubtedly wrong in affirming that the rate 
of interest would be lowered. B, not being able at first 
to loan all his capital, might for a time lower his profits 
to induce the others to borrow more, but very shortly the 
value of their goods would rise, and B could then employ 
both his new and his old money at the previous rate. But 
if Mill means the general increase of the wealth of the 
community, such increase does not, under the conditions 
we have supposed, at all affect the demand and supply of 
loanable funds. If we suppose them doubled all round, 
or some of them doubled, some not, the ratio would be 



CREDIT. 109 

the same, and, if the rate of interest truly depended upon 
such ratio, it would always be uniform. 

But, although the demand and snpjDly of loanable 
funds can not vary except together, the activity of the 
money market may vary, just as the activity of exchange 
may, although the demand and supply of commodities 
are equivalent terms, and the activity of the one as of 
the other will vary from the same cause, viz., the increase 
or decrease of profits. 

In our illustration we have supposed prices of every- 
thing, labor included, to remain uniform. Now, let us 
see how our five capitalists would act when prices did 
vary. If all prices, including the price of labor, varied 
together, as soon as exportation or importation had ad- 
justed the amount of gold thereto, the old conditions 
would be restored : let us su|)pose the prices of com- 
modities fall, and the price of labor does not fall, or, 
what is the same thing, that labor rises in money price, 
while commodities remain stationary or fall. It is evi- 
dent that M and F will borrow more than they did if 
they go on producing ; but they will be under no ne- 
cessity of borrowing of B at all, supposing their stock 
not to be in excess of their capital and they totally cease 
producing. Let us suppose that they go on producing, 
but only to half the former extent ; all the exchanges we 
have supposed will go on exactly as they did before, but 
they will only be to about half the amount. B's capital, 
as before, would remain in his hands, and the ratio of 
deposits to discounts would remain nearly the same as it 
previously was, and they alone constitute the demand 
and supply of the loan market. B's capital, which, by 
supposition, consists wholly of money, if the system of 
payment is entirely by checking, will never be out of his 



110 CAPITAL AND POPULATION, 

hands, and is in no sense an addition to loanable funds, 
but purely and simply an instrument of exchange, and 
could be entirely dispensed with without any effect upon 
the loan market, if it were not needed as an element of 
confidence. 

The cause of money being tight or plenty is that our 
system of banking is not ideally perfect. If it were so, 
no activity in the loan market would have the slightest 
effect upon bankers' reserves ; as it is, more is required 
when the sum total of discounts is large, to allow for the 
transfer of funds, and this amount comes, of course, from 
the reserve. JNow, it is only as this reserve is affected 
that lenders will be able to exact more, or be willing to 
take less, than such rate of interest as will yield them the 
average rate of profit at the time, consideration being, of 
course, given to risk, trouble, and skill, and to the expec- 
tation of a rise or decline in the exchange value of money. 
Under an ideally perfect system of banking, by which we 
mean that all transfers were by check alone, bankers 
would be wholly unable to affect the total reserve ; and, 
as it is, they have very limited power of doing it. But 
individual bankers can decrease or increase their own 
reserve, though at the expense of the reserves of others, 
and the disposition during dull times to lend a portion of 
it, and during times of activity when the reserve dimin- 
ishes, or of panic when each banker desires to accumu- 
late in his vaults all he can, irrespective of any profit he 
may thereby fail to obtain, the eagerness to retain the 
utmost share of the total reserve, enables bankers to fix 
the rate of interest below or above what may be called 
the normal rate. The interest of money is, therefore, 
affected by the activity of the loan market, but in no 
sense depends upon the ratio of demand and supply of 



CREDIT. Ill 

loanable funds. Anything which affects the proportion 
between money and other commodities affects likewise 
the rate of interest, but only until prices are adjusted 
to the new conditions. Great speculators frequently 
avail themselves of this, and temporarily raise the rate 
of interest by locking up large amounts of money; if, 
however, they should permanently abstract such funds 
from the circulation, the rate of interest, other things 
remaining the same, would be the same as before, as 
soon as prices had sufficiently fallen. 

Through one circumstance, however, the increase of 
loans does affect the rate of interest. We have seen that 
the rate is raised by any decrease in the reserve of bank- 
ers. Such reserve is needed as an element of confidence 
and to allow of the fluctuations in the amount of the 
individual reserves of professional lenders. We have 
also seen that, when the loan market is active, the total 
reserve will be decreased on account of the greater 
amount of money in transit ; but in addition to this the 
proportion between the reserve and the amount of loans 
is disturbed by an increase of the amount on loan. This, 
so far as it occurs, impairs confidence and adds somewhat 
to the risk of lending. The only influence which causes 
the rate of interest to differ from the rate of profit is the 
expectation that prices will decline or rise during the life 
of the loan, as the difference in the nominal rates caused 
by want of confidence is at bottom caused by the risk or 
supposed risk involved, and this is always considered and 
defined as an element of the rate of profit itself. 

Mill's apprehension of the phenomena of the loan 
market seems to me to be open to the same objections, 
which he derives from Say, and opposes to the idea that 
the supply of commodities does not itself constitute the 



112 CAPITAL AND POPULATION". 

demand for commodities. I have here criticised his 
views, not because they have any effect npon the main 
theme of this treatise — the relation of capital to popula- 
tion — but because he attempts to find in them the sole 
causes of commercial crises and industrial stagnation, the 
comprehension of which is only possible when such rela- 
tions are clearly understood. The idea that the rate of 
interest depends upon the demand and supply of loanable 
funds or upon the amount actually on loan at the time, is 
certainly misleading; that rate is entirely governed by 
the element of the supposed risk involved, and the ex- 
changeable value of the use of capital at the time ; and it 
is only as influencing these two elements that the activity 
or amount of loans has any effect. 



CHAPTEE YII. 



WAGES AND PEOFITS. 



It were a desideratum in economic discussion that tlie 
word "wages" should never be used without a prefix. 
The subjects, in discussing which the term comes into 
play, are so complicated that no mind is able to carry its 
connotations without occasionally tripping, when the un- 
qualified term is alike used for its three very distinct 
significations, which I would distinguish as proportimial, 
real^ and monefy wages. 

The word " proportional " is my own, and will not be 
met with elsewhere, at least to my knowledge. I have 
so far used it without explanation, as my meaning was 
sufficiently distinct for the previous stages of the argu- 
ment. Mill and Ricardo express the idea by the generic 
term " wages " alone, and especially note the fact in each 
instance, when they desire to distinguish it from real or 
money wages. I can not but think that this has led 
them into some confusion, and prevented them from per- 
ceiving several of the implications of their argument. I 
must confess I am unable in places to understand exactly 
what they mean by " wages," and to such extent, that I 
find it difficult to criticise their doctrines before defining 
what I understand and mean to express by the three 
terms " proportional, real, and money wages. 



?? 



114 CAPITAL AND POPULATION. 

Proportional wages, then, I understand, or, rather as 
the term is my own, I define to be, the proportion of the 
product received as wages by the laborer or laborers who 
produced it, after a deduction from such product is made 
for rent and for the profits of any fixed capital employed. 
j If any material enter into the product not produced by 
the laborers, whose proportional wages are under consid- 
eration, its cost and the profit thereon are also to be first 
deducted. After rent," raw produce, and the use of fixed 
capital are paid for, the proportion in which what re- 
mains is divided between the laborers and the owners of 
I' the active stock determines this rate of wages and the 
[ rate of profit. It is not, as might at first be supposed, as 
owners of dead stock also that the share of capitalists 
must be computed ; the motive of their engaging in pro- 
duction includes, indeed, the profit on dead as well as on 
active stock. If the rate of profit on the entire capital 
expended as wages, and in holding their goods for a 
market, is insufficient, they will not produce. But the 
profit on dead stock must here be considered as equiva- 
lent to a profit on fixed capital, and as not affecting the 
computation of the rate of proportional wages. To illus- 
trate, w^e will suppose two capitalists, one of whom pro- 
duces wheat and the other wine, and that the wheat can 
be sold within the year, while the wine can not find a 
market under two years. It is clear that the larger profits 
of the wine-grower should not be considered as lowering 
the proportional wages of his employes or the rate of 
profit he obtains. During the last year it is kept, the 
wine may be fairly considered, for the purposes of this 
discussion, as fixed, not circulating capital. The propor- 
tion of the product which goes to capital varies, of 
course, according to the amount of capital employed, as 



WAGES AND PROFITS. 115 

well as with the rate of profit obtained. What deter- 
mines the rate of wages, however, is not the amount, but 
simply the rate of profit. We do not mean, therefore, by / 
" proportional " that the proportion is between the wages- 
fund and the gross product. Such proportion can vary 
indefinitely as machinery is substituted for manual exer- 
tion, or as the normal amount of dead stock is increased 
without disturbing the "cost of labor" to the capitalist, 
or the reward of labor to his employes. But, while not 
affecting the computation of the rate of proportional 
wages, the amount of profit on fixed capital and dead stock 
profoundly affects the tendency to a rise or fall of such 
wages ? Capitalists do not ordinarily distinguish in their 
calculations between such profits and those they receive 
on their expenditure for wages, nor, indeed, need they, ' 
as they never vary in their comparative rate to any ap- 
preciable amount. If the general rate of profit is low, ; 
proportional wages will be high, with a tendency to de- j 
crease ; if it is high, such wages will be low, with a ten- ! 
dency to increase. 

The amount of dead stock in existence does, however 
— ^proportional wages remaining the same — considerably 
affect real wages, when such dead stock is partly com- 
posed of things that laborers are accustomed to consume. 
The rate of profit remaining the same, the larger the 
amount of such things in existence, the higher will be the 
price in proportion to the money -wages that the laborer 
must pay for them, and the smaller the amount of such 
things he is able to consume. The laborer's interests are, 
therefore, subserved by any policy or event which de- 
creases the normal amount of dead stock, at least so far 
as it consists of articles he consumes. 

It is customary for economists to assert indifferently 



116 CAPITAL AND POPULATION. 

that the rate of wages depends on the ratio of capital to 
population, and on the demand and supply of labor. 
They consider the two to be equivalent propositions. If 
they mean, as the exigencies of their argument demand, 
proportional wages, they are right as to the former, but 
wrong as to the latter proposition, and the two proposi-. 
tions are the opposite of equivalent. When the ratio of 
capital to population is the largest, is exactly the time 
when the demand for labor is the least. The demand 
does not depend upon the amount of commodities physic- 
ally available for the wages-fund, but upon the amount 
that can be employed with a profit as active stock. This 
amount, we have seen, varies inversely with the amount 
of circulating capital in gross, and we have the apparent 
anomaly that the exchangeable value of labor, unlike 
that of other commodities, is highest when the demand 
for it is least, the supply remaining, by supposition, the 
same. The explanation lies in the fact, that such a state 
of affairs depresses the exchangeable value of the com- 
modities in which wages are really paid, more than it de- 
presses the exchangeable value of labor, and, value being 
j a relative term, the value of labor as compared with such 
1^ commodities is enhanced. If any commodity be an ex- 
\ ception to the increase of the ratio of capital to popula- 
tion, the exchangeable value of both labor and the other 
commodities (food, clothing, etc.), in which labor is really 
paid, will fall as compared with it. If they fall equally 
and the commodity be gold, the money rate of wages 
will decline, but not the proportional rate. When any 
material commodity is relatively in excess, its exchange- 
able value is lessened, because the commodities with 
which it exchanges are not relatively superabundant. 
But when the supply of labor exceeds the demand it does 



WAGES AND PKOFITS. 117 

so only because the supply of the things for which it is 
exchangeable are in excess to a greater degree. Its ex- 
changeable value, therefore, can not be decreased, but 
must be enhanced by any decrease in the demand for la- 
bor coincident with and caused by an increase in the 
ratio of capital to population. 

The rate of wages does not depend upon the demand 
for labor, but the demand depends upon it. The ten- 
dency to a rise or fall of the rate does indeed depend 
upon the extent of the demand, but such influence can 
only become operative when the demand has first changed, 
by its effect upon production and accumulation, the ratio 
of capital to population. What does directly depend 
upon the demand for labor is the amount of employment, 
the number of laborers that can be kept at work ; while 
the rate of proportional wages depends solely on the ratio 
of capital to population. 

The efiiciency of labor has nothing to do with the 
rate of proportional wages, nor has the margin of cultiva- 
tion. Proportional wages are equal whenever the rate 
of profit is the same, whether or not it takes in one place 
one hundred laborers to produce the same amount of com- 
modities that fifty produce elsewhere. ]^either has the 
price of labor anything to do with the rate. A rise in 
real or money wages may or may not be a rise in propor- 
tional, but a rise in proportional, or in money wages, other 
things remaining the same, necessarily entails a fall in real 
wages, as we shall now see in proceeding to a considera- 
tion of the latter. 

The rate of real wages can be ascertained by dividing 
the amount of the wages-fund by the whole number of 
laborers, not by the number only of those employed. 
The latter division would ascertain for us what is popu- 



7^ 



118 CAPITAL AND POPULATION. 

larlj called the "going"' rate of wages, and that name 
for them will do as well as any other, as what such rate 
is does not much affect the principles or deductions of 
the science. In defining real wages, Mill says, in Book 
II, chapter xxvi, section 1 : 

" What is here meant, however, by wages, is the laborer's real 
scale of comfort ; the quantity he obtains of the things which nature 
or habit has made necessary or agreeable to him ; wages, in the 
sense in which they are of importance to the receiver." 

And in the preceding paragraph he affirms that such 

" wages depend on the ratio between population and capital ; and 
would do so if all the capital in the world were the property of one 
association, or if the capitalists among whom it is shared maintained 
each an establishment for the production of every article consumed 
in the community, exchange of commodities having no existence. 
As the ratio between capital and population, in all old countries, 
depends on the strength of the checks by which the too rapid in- 
crease of population is restrained, it may be said, popularly speak- 
ing, that wages depend on the checks to population ; that when the 
check is not death, by starvation or disease, wages depend on the 
prudence of the laboring people; and that w^ages in any country 
are habitually at the lowest rate to which in that country the 
laborer will suffer them to be depressed rather than put a restraint 
upon multiplication." 

This definition I accept : the afiirmation I have re- 
peatedly shown to be true inversely, and in a sense di- 
rectly the reverse of Mill's. 

Other things being equal, the rate of real and propor- 
tional wages varies inversely, though not in strict propor- 
tion. A rise in the latter always entails a loss of employ- 
ment, which usually more than offsets to the laborer the 
benefit of the rise : a rise of two per cent would proba- 
bly be followed by a decrease of ten or twenty per cent 



WAGES AND PROFITS. 119 

in the number of laborers employed. (I am speaking 
now of the temporary rise that occurs periodically in the 
fluctuations of trade, and not of the decrease in what may 
be called the normal rate of profit that proceeds with the 
growth and civilization of a country. This decline of the 
normal rate does not lead to any cessation of industry. 
Capitalists, being as well satisfied with the smaller rate 
as they were before with the larger, are equally willing 
to employ their funds productively.) There is no neces- \ 
sary ratio between the rise in proportional and the fall in ' 
real wages. Such rise may entail a slight and lasting or 
a severe and transient cessation of employment, which, 
when it occurs, will depend upon various causes, many of 
which may be accidental, and not due to the action of 
economic law ; unless, however, the economic conditions 
are disturbed by abnormal causes, such, for instance, as 
the occurrence of war, the detriment to the laborer 
through the decrease of employment must be many times 
the advantage gained by the rise of his proportional 
wages. It must be so by about the amount that pro- 
ductive consumption is decreased during the period of 
lessened production. 

Although, in his main argument, Mill constantly af- 
firms that " wages " and the rate of profit vary inversely, 
he qualifies the statement, in the succeeding quotation 
from him, by substituting the term " cost of labor " for 
" wages " : 

"We thus arrive at tlie conclusion of Eicardo and others, that \ 
the rate of profits depends on wages ; rising as wages fall, and fall- '' 1 
ing as wages rise. In adopting, however, this doctrine, I must in- 
sist upon making a most necessary alteration in its wording. Instead 
of saying that profits depend on wages, let us say (what Ricardo 
really meant) that they depend on the cost of labor. 
6 - l.,--=«^^ 



120 CAPITAL AND POPULATION. 

"Wages and the cost of labor — what labor brings in to the 
laborer, and what it costs to the capitalists — are ideas quite distinct, 
and which it is of the utmost importance to teep so. For this pur- 
pose it is essential not to designate them, as is almost always done, 
by the same name. Wages in public discussions, both oral and 
printed, being looked upon from the point of view of the payers, 
much oftener than from that of tie receivers, nothing is more com- 
mon than to say that wages are high or low, meaning only that the 
cost of labor is high or low. The reverse of this would be oftener 
the truth ; the cost of labor is frequently at its highest where wages 
are lowest. This may arise from two causes. In the first place, 
the labor, though cheap, may be inefiicient. In no European coun- 
try are wages so low as they are (or, at least, were) in Ireland ; the 
remuneration of an agricultural laborer in the west of Ireland not 
being more than half the wages of even the lowest-paid Englishman, 
the Dorsetshire laborer. But if, from inferior skill and industry, 
two days' labor of an Irishman accomplished no more work than an 
English laborer performed in one, the Irishman's labor cost as much 
as the Englishman's, though it brought in so much less to himself. 
The capitalist's profit is determined by the former of these two 
things, not by the latter. That a diff'erence to this extent really 
existed in the efficiency of the labor, is proved not only by abundant 
testimony, but by the fact that, notwithstanding the lowness of 
wages, profits of capital are not understood to have been higher in 
Ireland than in England. 

"The other cause which renders wages and the cost of labor no 
real criteria of one another is the varying costliness of the articles 
which the laborer consumes. If these are cheap, wages, in the 
sense which is of importance to the laborer, may be high, and yet 
the cost of labor may be low; if dear, the laborer may be wretch- 
edly off^, though his labor may cost much to the capitalist. This last 
is the condition of a country overpeopled in relation to its land ; in 
which, food being dear, the poorness of the laborers real reward 
does not prevent labor from costing much to the purchaser, and low 
wages and low profits coexist. The opposite case is exemplified in 
the United States of America. The laborer there enjoys a greater 
abundance of comforts than in any other country of the world, ex- 
cept some of the newest colonies : but, owing to the cheap price at 
which these comforts can be obtained (combined with the great 



WAGES AND PROFITS. 121 

efficiency of the labor), the cost- of labor is, at least, not higher, nor 
the rate of profit lower, than in Europe. 

"The cost of labor, then, is, in the language of mathematics, a 
function of three variables : the efficiency of labor ; the wages of 
labor (meaning thereby the real reward of the laborer) ; and the 
greater or less cost at which the articles composing that real reward 
can be produced or procured. It is plain that the cost of labor to 
the capitalist must be influenced by each of these three circum- 
stances, and by no others. These, therefore, are also the circum- 
stances which determine the rate of profit ; and it can not be in any 
way affected, except through one or the other of them. If labor 
generally became more efficient, without being more highly reward- 
ed ; if, without its becoming less efficient, its remuneration fell, no 
increase taking place in the cost of the articles composing that re- 
muneration ; or, if those articles became less costly, without the labor- 
er's obtaining more of them — in any one of these three cases, profits 
would rise. If, on the contrary, labor became less efficient (as it 
might do from diminished bodily vigor in the people, destruction of 
fixed capital, or deteriorated education) ; or, if the laborer obtained a 
higher remuneration, without any increased cheapness in the things 
composing it ; or if, without his obtaining more, that which he did 
obtain became more costly — profits, in all these cases, would suf- 
fer a diminution. And there is no other combination of circum- 
stances in which the general rate of profit of a country, in all em- 
ployments indifferently, can either fall or rise." — (Mill, Book II, 
chapter xv, section 7.) 

The proportion between real and proportional wages, 
besides the eifect of their tendency to vary inversely, is 
also affected by the margin of cultivation ; the physical 
efficiency of the laborers — their education or mental effi- 
ciency — any social custom, or other cause, which prevents 
a part of their number from finding emjDloyment, and 
the degree of skill demanded by the nature of the na- 
tional industries. 

As, in the quotation above. Mill and Ricardo uniformly 
assume that real and proportional wages only differ from 



122 CAPITAL AND POPULATION 

the first tliree of these causes, the latter two they seem 
to have overlooked, while they certainly, by implication, 
deny what I have endeavored to establish as the greatest 
difference between them — the tendency to vary inversely 
through the effect upon the amount of employment of a 
rise or fall of the rate of profit. This last cause of differ- 
ence has received enough of our attention, and nothing in 
this connection calls for any further remarks upon the 
effect of the margin of cultivation, or of the physical or 
mental efficiency of the laborers, except to notice in 
passing, that the margin of cultivation is by far the most 
important determinant of the rate of real wages; the 
other two remaining causes are, however, of great mo- 
ment, especially as affecting subjects to be hereafter 
considered, and because they have so generally been 
ignored. 

I would remark, then, that anything which prevents 
those debarred, by physical or mental disability, or by sex, 
from seeking or finding general employment, from seek- 
ing or finding the special employment, for which they 
are fitted, lowers the rate of real wages as compared with 
proportional, and is a deduction from the comforts and 
subsistence of the laboring classes, exactly equal to what 
such persons would earn if employed, or rather to what 
those whose places they took would earn if employed, as 
they would necessarily very soon be, since the increase in 
the number of laborers, involved in such change of em- 
ployment, could not but affect favorably the rate of profit, 
and correspondingly enlarge the demand for labor. But 
that they should be engaged productively is likewise to 
the advantage of the capitalist, because it increases the 
normal ratio which capital can bear to population without 
increasing the population itself. The additional produc- 



WAGES AND PROFITS. 123 

tion that wo aid then take place would allow of further 
accumulation by the rich, sufficient to employ such labor, 
without lowering the rate of profit at all. It is the in- 
terest of employer and employe alike that all their fel- 
low-citizens should be engaged productively. We suffer, 
perhaps, from no greater economic evil than the social 
custom which discourages one half the human family — 
the female sex — from engaging in productive employ- 
ment, and condemns them almost entirely to unproduc- 
tive services, or an idle dependence upon producers, as a 
means of support. Nature has, indeed, apportioned the 
household duties to the wives, mothers, and daughters, 
and these duties are necessarily of the nature of services, 
and not productive : but the demand for these services 
does not happen to be sufficient to employ the whole or 
nearly the whole sex, and the labor of those n.ot needed 
should be productively engaged. If it were, it is not too 
much to assert that the annual produce of the country 
would be increased at least ten to fifteen per cent, and 
such increase would be a pure addition to net as well as 
gross income. But another economic effect would follow 
of incalculable importance to the future of the race. The 
tendency of population to press upon the food-supply 
would certainly be lessened and probably obliterated by 
it. The great addition to income involved would not only 
be mainly devoted to a rise in the standard of living, 
but the opportunity of self-support would remove the 
necessity of matrimony to women as the only alternative 
by which they can hope to escape starvation or depend- 
ence. Besides which, marriage between young men and 
women, productively employed, would involve a positive 
decrease of their joint income, that could not fail of 
acting as a 23reventive to unwise unions. Political econ- 



124 CAPITAL AND POPULATIOK 

omy has been named " the dismal science," for no other 
reason than the seeming impossibility of applying really 
efficient preventive checks to the too rapid increase of 
population, that are not also subversive of the best social 
instincts of the race. But here is a check probably of 
itself sufficient, that will accord with and not antagonize 
personal inclination. 

If, then, the proper aim of government is the good of 
the whole, women have a right to claim, while debarred 
by social custom from other employments, the exclusive 
appointment to every office the duties of which are not 
inconsistent with their physical organization or moral deli- 
cacy, even in cases where their efficiency is so inferior to 
that of men as to involve a considerable additional ex- 
pense to the government. Such a national policy, once 
established, would also encourage the employment of 
female labor by private individuals, with the effect of 
considerably increasing the national ]3rosperity. 

But the jDolicy of government providing a stimulus 
to the employment of female labor also affects the ques- 
tion of free trade and protection. Most of our protected 
industries, especially the manufacture of textile fabrics, 
employ large numbers of women and girls, wdio would 
not otherwise be productively employed at all in the 
agricultural or household pursuits from which our pro- 
tective policy has diverted them. The value of this labor 
— and it is certainly not less than fifty per cent of that 
employed in our cotton, woolen, and silk mills — is to be 
offset against any loss in the efficiency of our labor from 
what it w^ould have been under free trade, before any 
decrease in the productive capacity of the nation can be 
attributed to protection. 

The following passage from Mill, in a note to Book I, 



WAGES AND rROFITS. 125 

chapter v, section 1, fully sustains in principle the posi- 
tion here taken : 

"An exception must be admitted when the industry created or 
upheld by the restrictive law belongs to the class of what are called 
domestic manufactures. These being carried on by persons already 
fed—hj laboring families, in the intervals of other employment — 
no transfer of capital to the occupation is necessary to its being un- 
dertaken, beyond the value of the materials and tools, which is 
often inconsiderable. If, therefore, a protecting duty causes this 
occupatjoiajto^ be carried on, when it otherwise would not, there is 
in this case a raaijncrease of the production of the country." ' 

This leads us to make the same remark of the remain- 
ing cause of difference between real and proportional 
wages. Any increase of skill required of the laborer, by 
a change in the nature of his trade, is a direct benefit to 
the laboring classes, as it raises some of their number to 
a higher social status, in which they are able to raise the \ 
average rate of real, without any increase of proportional, | 
wages. The skill required of artisans and the rate of 
real wages that they receive are on the average, in every 
land, decidedly greater than the skill demanded of and 
the real wages accorded to agricultural laborers. What- 
ever this addition to real wages, due to protection, may 
be, it is also to be offset against any losses due to the 
same cause. The gain is considerable, but not equal to 
that of the employment of female labor. It may, per- 
haps, be estimated at from ten to fifteen per cent of the 
male labor diverted from agriculture to manufactures. 

It is important to notice that both these gains, what- 
ever they are, accrue mainly to the benefit of labor, and 
do not add to the rate of profits, or to its gross amount, 
except as they allow of more capital being accumulated 
and profitably employed, and that they find no expression 



126 . CAPITAL AND POPULATION. 

in the prices at wliich international exchanges take place. 
If, in all countries, journeymen watch-makers earned in a 
day five times as much as common laborers, and it took 
ten days' labor to make a watch, a country, in which the 
margin of cultivation was such that the wages of common 
labor was one dollar per day, could produce a watch for 
fifty dollars, while a more fertile and less peopled land, 
where labor was worth one dollar and a half per day, 
could not produce the watch under seventy-five dollars. 
Under free trade, the latter would buy watches of its less 
fertile and overpeopled neighbor, and would apparently 
save twenty-five dollars on each watch by so doing; 
whereas the apparent gain of its neighbor would be only 
five dollars, that being by supposition the difference be- 
tween the productive efiiciency of ten days' agricultural 
labor in the respective countries. Supposing the efficiency 
of artisan labor to be the same in each country, the joint 
gain of the interchange would only be that resulting 
from the fertile soil of the one being cultivated in place 
of the more sterile soil of the other. This gain amounts 
to five dollars, and is the identical five dollars gained by 
the watch-making nation ; whereas the twenty-five-dollar 
gain to the agricultural nation is only apparent, being 
under protection a mere transfer from the consumer to 
the skilled artisan. 

By diverting ten days' labor from agriculture to the 
better-paid watch-making, the over-populated country 
has gained a value of forty dollars. By a like diversion, 
which could, however, only take place under protection, 
the under-populated country would increase the value of 
its products to the extent of sixty dollars ; twenty-five of 
them, liowever, being at the expense of its own consum- 
ers, its net gain would be only thirty-five. In such case 



WAGES AND PROFITS. 127 

protection would result in a loss to the world of five dol- 
lars, but also to such a redistribution of wealth as would 
result in a net gain to the protected country of thirty-five 
dollars, and a net loss to its manufacturing neighbor of 
forty. In my illustration, I have supposed that the ratio 
of skilled to common wages was the same in both places. 
This, however, except for convenience of calculation, 
makes no difference, as long as, in both places, there is 
some distinction made in favor of skilled labor. The 
expense of educating the laborers to their higher condi- 
tion of life is also, of course, to be deducted from the 
net gain of thirty-five dollars.* 

* " Although, however, general wages, whether high or low, do not affect 
values, yet if wages are higher in one employment than another, or if they 
rise or fall permanently in one employment without doing so in others, 
these inequalities do really operate upon values. The causes which make 
wages vary from one employment to another have been considered in a 
former chapter. When the wages of an employment permanently exceed 
the average rate, the value of the thing produced will, in the same degree, 
exceed the standard determined by mere quantity of labor. Things, for 
example, which are made by skilled labor, exchange for the produce of a 
much greater quantity of unskilled labor ; for no reason but because the 
labor is more hig-hiy^ paid. If, through the extension of education, the la- 
borers competent to skilled employments were so increased in number as to 
diminish the difference between their wages and those of common labor, all 
things produced by labor of the superior kind would fall in value, compared 
with things produced by common labor, and these might be said, therefore, 
to rise in value. We have before remarked that the difficulty of passing 
from one class of employments to a class greatly superior has hitherto 
caused the wages of all those classes of laborers who are separated from 
one another by any very marked barrier to depend more than might be 
supposed upon the increase of the population of each class, considered sep- 
arately ; and that the inequalities in the remuneration of labor are much 
greater than could exist if the competition of the laboring people generally 
could be brought practically to bear on each particular employment, 

" It thus appears that the maxim laid down by some of the best polit- 
ical economists, that wages do not enter into value, is expressed with greater 



128 CAPITAL AND POPULATION, 

The consideration of money -wages need not detain 
lis long. Their rate is evidently ascertained by dividing 
the money value of the wages-fund by the number of 
laborers employed. That of real wages is determined by 
the ratio of the utility of the wages - fund to the whole 
number of laborers, while the rate of proportional wages 
is, strictly speaking, not a rate of wages at all, but is the 
ratio of the wages-fund itseK to the gross product after 
rental and the use of fixed capital are paid for. The 
consideration of money-wages is chiefly of interest, be- 
cause it is through change in them that changes in the 
I others are effected. It is at present sufficient for my 
' purpose to say that a general rise in money-wages, other 
money values remaining the same, or, in other words, a 

latitude than the truth warrants, or than accords with their own meaning. 
Wages do enter into value. The relative wages of the labor necessary for 
producing different commodities affect their value just as much as the rela- 
tive quantities of labor. It is true, the absolute wages paid have no effect 
upon values ; but neither has the absolute quantity of labor. If that were 
to vary simultaneously and equally in all commodities, values would not be 
affected. If, for instance, the general efficiency of all labor were increased, 
so that all things without exception could be produced in the same quantity 
as before with a smaller amount of labor, no trace of this general diminu- 
tion of cost of production would show itself in the values of commodities. 
Any change which might take place in them would only represent the un- 
equal degrees in which the improvement affected different things; and 
would consist in cheapening those in which the saving of labor had been the 
greatest, while those in which there had been some, but a less saving of labor, 
would actually rise in value. In strictness, therefore, wages of labor have 
as much to do with value as quantity of labor ; and neither Ricardo nor any 
one else has denied the fact. In considering, however, the causes of varia- 
tion in value, quantity of labor is the thing of chief importance ; for, when 
that varies, it is generally in one or a few commodities at a time, but the 
variations of wages (except passing fluctuations) are usually general, and 
have no considerable effect on value." — (Mill, Book III, chapter iv, sec- 
tion 3.) 



WAGES AND PROFITS. 129 

relative rise, results always in a rise of proportional and f ^ 
a fall in real wages, tlirongli cessation of employment. 

It may be well, in closing this chapter, to remark that 
the result of the discussion as to whether such a fund as 
the wages-fund really exists will not affect the argument. 
All that is implied by the term, as I have used it, could 
have been as well expressed by the term ^' gross amount 
of wages." To my mind, it seems evident that past and 
present social and economic conditions do accurately pre- 
determine the amount that will be exjDended in wages, to 
such degree that the amount of that fund may be strictly 
considered as set apart ; but, if by predetermination it is 
meant tliat the amount of the wages-fund is j)redeter- 
mined by the intentions of capitalists, I do not view it as 
governed by such intentions, except to a very slight and 
temporary amount. 



CHAPTER YIII. 



CAPITAL AND LABOR. 



The consideration that we have just given to wages 
will enable ns to appreciate better the true relations of 
capital and labor. 

The interest of the laborer lies solely in the rate of 
his real wages, and any change in proportional or in 
money wages is a matter of indifference to him, except 
as such change affects the rate of real. The sole interest 
of the capitalist, however, is that the rate of proportional 
wages should be low, and he has no economic concern 
with real or money wages, except as they affect proj^or- 
tional. 

It has been commonly assumed that, while capitalists 
and laborers were both interested that the gross annual 
produce should be as large as possible, their interests 
were antagonistic when it came to a division of the 
spoils, and that any increase in the share of one class 
could only be at the expense of a decrease, not only of 
the relative but of the absolute share of the other. 
E"ow, this is true as far as individuals actually engaged 
in production divide a certain fixed product, but not true 
of the absolute share of either class as a whole, because 
there is a division of present products that by leading to 
an increase of future products increases the absolute share 



CAPITAL AND LABOR. 131 

of each class, though not, of course, the relative share of 
one or the other of them. It can not, indeed, be assert- 
ed that the points at which the absolute share of each 
will be the greatest always coincide exactly, but the 
points are evidently very near together — so near, that 
the attainment of one will practically be the attainment 
of the other also. 

In any given society, it is the interest of the capital- 
ists that capital should bear such a ratio to population, as 
that the sum arrived at by multiplying the gross capital 
by the rate of profit, which normally results from such 
ratio, shall be the greatest. Any increase of capital, be- 
yond that amount, will augment the gross sum on which 
profit is attained, but lessen the rate — any decrease will 
augment the rate, and lessen the gross sum ; but in either 
event the gross income derived from profits will be de- 
creased. The interest of the laborer will likewise be 
subserved when capital bears such a ratio to population 
that the sum arrived at by multiplying the number of 
laborers employed by the average rate of their propor- 
tional wages, or, in other words, the total wages-fund, 
shall be the greatest. Any increase of capital, beyond 
that amount, will augment the rate, but decrease the 
number employed ; and any decrease will augment the 
number, but decrease the rate ; and in either event the 
gross income from wages will be lessened. The inter- 
ests of both classes are therefore identical in the increase 
of the gross product, and very nearly, if not quite, iden- 
tical in its division also, because the ratio of capital to 
population ultimately depends upon such division. 

But, as I have before remarked, the interests of indi- 
viduals do not coincide with the interests of the classes 
to which they belong. Every employer will grow richer 



132 CAFITAL AND POPULATION. 

bj paying low wages^ and every laborer by exacting high 
ones, at least as compared with their fellow employers 
and employes. We have here a case in which individ- 
ual are opposed to social interests. The antagonism be- 
tween labor and capital results wholly from the growth of 
class out of individual animosities. It subserves the in- 
terest of every employer that other capitalists should pay 
higher wages than he does, and the interest of every la- 
borer that other laborers should work for lower wages 
than his own. The individual interest of each is really 
coincident with that of the class to which he does not be- 
long. When this is recognized, and not before, may we 
expect the two classes to harmonize in their feelings and 
actions. 

While the ratio of capital to population that yields the 
greatest income to capital may not always be identical 
with that which yields the greatest income to labor, it is 
evident that the ratio which leads to the greatest annual 
production subserves best the interest of the community, 
and that political and social action should, as far as pos- 
sible, be directed to secure such ratio, with a leaning, per- 
haps, to the interests of labor from humane but not from 
economic motives. 

The real interest of the laboring classes is in real 
wages, and this interest can be advanced : First, by in- 
creasing their own efficiency by a more faithful and in- 
dustrious performance of their duties. As they receive 
much the greater part of the gross produce, they them- 
selves suffer the greater part of the loss resulting from 
laziness and inefficiency. The immediate loss, indeed^ 
falls upon their employers, but they distribute this among 
the consumers of their goods by enhancing their price, 
and the laborers themselves suffer it ultimately as such 



CAPITAL AND LABOR. 133 

consumers. Secondly, by any change in the nature of 
the national industries, by which more of the class are 
raised from the position of common laborers to that of 
skilled artisans. Thirdly, by increasing the proportion 
of their own number who enter the labor market as com- 
petitors for employment. I refer here chiefly to the em- 
ployment to a greater extent of female labor. Fourthly 
and lastly, by never seeking to raise their proportional 
wages to a point that will allow capital such scant remu- 
neration as will lead to a decline of production. 

Owing to the confl.ict between individual and social 
or class interests, to which I have already adverted, the 
class action of laborers, as it has expressed itself in trades- 
unions, has been diametrically opposed to their true in- 
terests as here ascertained. First, they have endeavored 
to lessen their own efficiency in production. Secondly, 
their action has tended to discourage any change in the 
nature of industry in the direction of substituting skilled 
for common labor, because it is in skilled industries alone 
that they are able to combine effectually enough to influ- 
ence at all the rate of profit and the expense of conduct- 
ing such industries ; besides which, in such industries, by 
enforcing the occasional idleness of fixed capital, they 
augment in them the amount of capital that is necessary, 
and thus lessen not only the absolute but the relative 
share of the produce that accrues to themselves. Third- 
ly, they have failed to demand, as their moral and j^olit- 
ical right, the greater employment of female and prison 
labor ; and, fourthly, they have persistently endeavored 
to raise the rate of proportional wages beyond the point 
that allowed of such a rate of profit as was consistent 
with the highest rate of real wages. 

Their whole action has been directed, not only toward 



134 CAPITAL AND POPULATION. 

the lessening of the gross sum, of which thej obtain a 
part, but to the reduction against themselves of the ratio 
in which that sum is divided between capital and labor. 
They have succeeded in reducing, not only their absolute 
but in some degree their relative share ; for this mistaken 
action they can not be blamed, if real and proportional 
wages coincide to the degree taught by English econo- 
mists, and if over-accumulation is really not antagonistic 
to their employment in production. If I am wrong, their 
action is, in the main, right, and little improvement in 
their condition can be hoped for ; but, if I am correct, it 
lies in the power of the laboring classes to nearly or quite 
double their real, without increasing in the least the rate 
of their proportional wages. The truer perception of the 
real relations of capital and labor, acquired by the recog- 
nition of the constant tendency of capital to press upon 
population, affords the only solution of the labor question, 
with its resulting problems of socialism and revolution. 
The condition of our laboring classes is very unsatisfac- 
tory, and daily becoming more so, " where wealth accu- 
mulates and men decay." They have a right to demand 
such social reorganization as shall give them a far greater 
absolute, though not relative, share of the earth's prod- 
ucts than they now receive ; and that this can, in a meas- 
ure, be done, not only not to the detriment, but to the 
positive advantage of capital, I have certainly made evi- 
dent. 

I must confess myself somewhat surprised at the fol- 
lowing passage from Mill's work, Book Y, chapter x, sec- 
tion 5 : 

" If it were possible for the working classes, by combining 
among themselves, to raise or keep up the general rate of wages, it 
need hardly be said that this would be a thing not to be punished, but 



CAPITAL AND LABOPw. 135 

to be ■welcomed and rejoiced at. Unfortunately, the effect is quite 
beyond attainment by such means. The multitudes who compose 
the working class are too numerous and too widely scattered to com- 
bine at all, much more to combine effectually. If they could do so, 
they might doubtless succeed in diminishing the hours of labor, and 
obtaining the same wages for less work. But if they aim at obtain- 
ing actually higher wages than the rate fixed by demand and supply — 
the rate which distributes the whole circulating capital of the coun- 
try among the entire working population — this could only be accom- 
plished by keeping a part of their number permanently out of em- 
ployment. As support from public charity would of course be 
refused to those who could get work and would not accept it, they 
would be thrown for support npon the trades-union of which they 
were members; and the work-people, collectively, would be no 
better off than before, having to support the same numbers out of 
the same aggregate wages. In this way, however, the class would 
have its attention forcibly drawn to the effect of a superfluity of 
numbers, and to the necessity, if they would have high wages, of 
proportioning the supply of labor to the demand." 

No passage more fertile than this in economic errors 
was ever penned, and an analysis of it will therefore 
serve admirably to exemplify the difference between 
Mill's view^s and my own. 

If, by combining, he means to assert that the laborers 
might be able to retain the same rate of proportional 
wages while shortening the hours of labor, I reply that, 
while this is technically true, it is not true in the sense 
that Mill intends. Even if the proportion between the 
number of laborers employed and the amount of the wages- 
fund might be maintained, the employment of a relatively 
larger active fixed capital would be necessary — the same 
amount of buildings, tools, and machinery being required 
for short as for long hours ; but such proportion would 
not be maintained, on account of the fall in profits. 
Labor, therefore, would receive a relatively smaller share 



136 CAPITAL AND POPULATION 

of a relatively smaller produce, unless, indeed, more work 
was accomplished in the short than in the long hours. 
Such a combination, if successful, could not fail to greatlj 
depress the rate of real wages as compared with propor- 
tional, and is reprehensible in its effects upon both labor 
and capital, and especially so in its effect upon the labor- 
ers themselves, though it is not a proper subject for legis- 
lative repression. Mill here affirms by implication that 
real and proportional wages are not differently affected by 
the efficiency of labor, although he has elsewhere pointed 
out that they are. Assuming also, contrary to his own 
definition of circulating capital, that it is all at once dis- 
tributed among laborers, he seems to suppose that the 
amount so distributed will depend, not upon the sup- 
posed value of what will be produced, but upon the 
amount of past accumulation. 

He then goes on to say, " But if they aimed at ob- 
taining actually higher wages than the rate fixed by de- 
mand and supply — the rate which distributes the whole cir- 
culating capital of the country among the entire working 
population — this could only be accom23lished by keeping 
a part of their number out of employment." But there 
is no rate at all determined by " the whole circulating 
capital " as one of its factors. And there is, further, no 
rate, either of proportional, real, or money wages depend- 
ent directly upon the demand for labor, because the cause 
of any change in demand for labor is itself a corre- 
sponding change in the ratio of the demand and supply of 
the commodities for which labor is exchanged. Curtail- 
ment in the amount of employment does, indeed, follow 
any rise of proportional wages, but it is not on account of 
the insufficiency of circulating capital, physically available 
for wages, but because such rise can only be at the ex- 



CAPITAL AND LABOR. 137 

pense of profits, the hope of which is the sole induce- 
ment to employ labor. 

There is, however, one trivial exception to the re- 
marks I have made, which it will be well to note, al- 
though neither theoretically nor practically of much im- 
portance. 

In Book Y, chapter x, section 5, of Mill's work, I find 

the passage : 

" Combinations to keep up wages are sometimes successful, in 
trades where the work-people are few in number, and collected in 
a small number of local centers. It is questionable if combinations 
ever had the smallest effect on the permanent remuneration of 
spinners or weavers; but the journeymen type-founders, by a close 
combination, are able, it is said, to keep up a rate cf wages much 
beyond that which is usual in employments of equal hardness and 
skill; and even the tailors, a much more numerous class, are under- 
stood to have had, to some extent, a similar success. A rise of 
wages, thus confined to particular employments, is not (like a rise 
of general wages) defrayed from profits, but raises the value and 
price of the particular article, and falls on the consumer." 

It is evident that when, in any particular trade, the 
rate of money- wages is raised by trades-unions, there is no 
rise of proportional wages ; for the price of the commodi- 
ty produced will soon, if not immediately, also rise enough 
to cover the increase in the cost of production ; but there 
will result a rise of real wages to the laborers engaged in 
the supposed trade, which will be gained by them at the 
expense of the consumers of the article produced. In so 
far as such article is consumed by the poor, there is no 
rise in the average real wages of the class ; but, in so far 
as it is consumed by the rich, there is such a rise, and at 
the expense, not of profits, but of the rich consumer. 
But whether this apparent rise will result in a real gain 
to the laboring class will depend entirely on the effect of 



138 CAPITAL AND POPULATION. 

the increased cost of such luxury upon accumulations. If 
the same money value is consumed as before, as it then 
takes fewer laborers to produce such value, some will be 
thrown out of employment, and the gross sum distributed 

I as wages will be unaffected. If less is consumed and ac- 
cumulations are thereby increased, there will be an abso- 

^ lute loss to the wages-fund ; but, if unproductive consump- 
I tion turns out to be increased, the laborer will gain a per- 
manent advance in his real wages. To some small extent 
the latter is the ordinary result, and trades-unions have 
probably secured to labor some small addition to real 
wages in this manner ; but the advantage gained, or that 
can be gained, is insignificant, and of very doubtful mo- 
rality, consisting as it does in forcing one class to pay 
more than another for the same commodity — labor. 



CHAPTEK IX. 



CO-OPEKATION. 



Co-OPEEATioN is iindoubtedlj the only final solution 
of the labor question. Although, as I have shown, both 
capital and labor are equally benefited by such division 
of the total produce as results in such total being the 
largest, and that either class loses and does not gain by 
securing for itself any larger proportion, the actions of 
the individuals composing each class will not, naturally, 
conduce to such fair and desirable division. The conflict 
between individual and social interest can only cease 
when each individual receives profits as well as wages. 
We are not here concerned with the moral and industrial 
effects that may be expected to flow from co-operation, 
further than to observe that its adoption must materially 
increase the efficiency of labor, but that such benefit can 
not be looked for except as the intelligence and morality 
of the laboring classes are further evolved. It belongs to 
our subject to consider what effect its adoption will have 
upon the ratio of capital to population. It is evident 
that, when wages and profits go wholly to the same indi- 
viduals, a general rise in proportional wages and corre- 
sponding decrea-se in profits will not, as now, at all dis- 
courage production. A general glut of material things 
will then be impossible, because labor will have ceased to 



140 . CAPITAL AND POPULATION". 

be a commodity. Gaining in wages what lie loses in 
profits, the inducement to the producex to go on witli 
^ productive consumption will be the same. This removes' 
' the present economic check to over-accumulation. In a 
co-operative society excessive accumulations will be no 
less useless than they are in ours, but they will not be so 
hurtful, because they will not lead to any cessation of 
\ industry. When they occur, they will entail a loss of con- 
I sumption alone, and may properly be considered as con- 
sumed unproductively, without affording any enjoyment 
or satisfaction; and the loss would be similar to that 
- i caused by fire or shipwreck. In such state of society ac- 
' cumulation would probably proceed almost, if not quite, 
i to the annihilation of profits, but would not go beyond, 
\ as it is not in human nature to knowingly suffer a greater 
present deprivation for a smaller future satisfaction. 

The determination of labor and capital to individual 
trades may then, as now, be excessive or deficient, with 
the result of a fall or rise of real wages and profits to the 
producers in them and to the corres]3onding benefit or 
loss of consumers — the producers in other trades. But 
this will lead only to a change and not to a^ cessation of 
employment. 

^" At present, accumxulations not only come almost ex- 
clusively from profits, but come in a disproportional de- 
gree from large profits. As a rule, the larger an individ- 
ual's income, the larger the proportion of it, both relatively 
and absolutely, that is saved. The inequality of individual 
fortunes has a powerful effect in intensifying the effect- 
iveness of the desire to accumulate. Under the present 
social state, the wage-receiving class are practically de- 
barred from accumulating at all when the accumulations 
of the rich are excessive ; the little they lay aside when 



CO-OPERATION. 141 

the wages-fund is large is pretty certain to be unproduc- 
tively consumed when the wages-fund is small, and, as 
we have seen, periods when it is small are the certain 
effect of over-accumulation by others. The effort by the ^i 
rich to be richer than economic law allows, in great meas- | 
ure prevents the poor from ever becoming possessors of I 
capital at all, and is the chief reason why the benefits of | 
our progress in civilization accrue almost wholly to the i 
fortunate few. 

Under co-operation, the inequality of individual fort- 
unes will be greatly lessened, and consequently the gross 
sum that can be spared and saved from incomes can not 
well be so great as at present, and the tendency of capital to 
press upon population will be correspondingly decreased. 
If the credit' system remains after the adoption of co-op- 
eration (and it is by no means inconsistent with it), there 
will remain some tendency to periodicity in insolvencies, 
but such periods will not be accompanied by any cessa- 
tion of industrial activity. There will be no loss of pro- \ 
duction, but merely a transfer from lenders to borrowers. I 
Under complete co-operation, industrial stagnation would 
be impossible, but some loss of confidence might occur, as 
the result of disproportion in production. 

It is, of course, true that the production of commodi- 
ties under co-operation might be no better fitted to the 
needs of consumers than now, and some cessation, or 
rather delay, of exchanges might occur ; but the conse- 
quent increase of dead stock could not then, as now, tend 
to any decrease in productive consumption, because then, 
labor being eliminated as a commodity, the demand and 
supply of commodities would be strictly the sum of ma- 
terial commodities themselves. The effect would be 
that any undue decrease in past unproductive consump- 



/ 



142 CAPITAL AND POPULATION". 

5 tion would soon be adjusted by a corresponding increase 
in future unproductive consumption, without productive 
consumption being eitlier increased or decreased. 

This result of co-operation, in doing away with peri- 
odic declines in industrial activity, has not, that I am 
aware of, been before perceived, nor could it be, until 
the economic effects of over-accumulation were recog- 
nized ; but it affords a very powerful argument for its 
adoption at the earliest practicable moment. The full 
result will only be obtained when the change to co- 
operation is complete, but the. severity of each crisis 
will be mitigated with every partial adoption of the 
system. 

While the ultimate effect of co-operation will be to 
do away with the vicissitudes of business, such vicissi- 
tudes, while they remain, operate against co-operation in 
its competition with the present system. The ]3ropor- 
tional wages and profits combined of tlj^ individual co-op- 
perative laborer are the same in good and in bad times, 
and his remuneration only varies as the proportion of the 
commodities he produces is greater or less than the 
amount of the commodities the community offers in ex- 
change for them ; but the amount of employment in his 
trade varies with that in those trades where the product 
is divided, in so far at least as such products are ex- 
changed for each other. The little accumulations, there- 
fore, of co-operative laborers are apt to be swept away 
during periods of stagnation, and the co-operative enter- 
prise destroyed through no fault of the operatives them- 
selves, but as the result of economic causes resulting from 
the faults of the competing system. This, together with 
the present moral and intellectual status of the laboring 
classes, renders the establishment of any co-operative en- 



CO-OPERATIOX. 143 

terprise very difficult, and it is, perhaps, too soon as yet 
to hope for any immediate success, save in exceptional 
circumstances ; nevertheless, the system should be kept j i 
in view, as the great and ultimate goal of political en- / 
deavor, and as the only panacea for many of our social { 
and economic evils. 
7 



CHAPTER X. 

FEEE TEADE AND PEOTECTION. 

The argument in favor of free trade is an exceed- 
ingly simple one — so simple, that we can not wonder at 
tlie contempt felt for the intellectual capacity of those 
writers who fail to comprehend it. To state it, I can 
not do better than to use the words of Mill, in Book III, 
chapter xvii, section 3, in which he says : 

"We perceive in what consists the benefit of international 
exchange, or, in other words, foreign commerce. Setting aside its 
enabling countries to obtain commodities which they could not 
themselves produce at all, its advantage consists in a more efficient 
employment of the productive forces of the world. If two coun- 
tries which trade together attempted, as far as was physically pos- 
sible, to produce for themselves what they now import from one 
another, the labor and capital of the two countries would not be so 
productive, the two together would not obtain from their industry 
so great a quantity of commodities as when each employs itself in 
producing, both for itself and for the other, the things in which its 
labor is relatively most efficient. The addition thus made to the 
produce of the two combined constitutes the advantage of the 
trade." 

To every word of which I cordially subscribe, except 
the implication that the " efficiency of labor and capital " 
is an equivalent term to the "efficiency of labor" alone. 
Any and every restriction upon commerce is undoubtedly 



FEEE TRADE AND PROTECTION. 145 

detrimental to the productive efficiency of the labor of 
the world. But, when the question is discussed of the 
distribution of the capitalized wealth of the world and of 
its annual produce, I take decided issue with the Enghsh 
school of political economy, and I shall be able to prove 
that the free interchange of an agricultural with a manu- 
facturing country not only may be, but to a large extent 
actually is, detrimental to the former, and that the latter 
may not only gain all the benefit of the increased pro- 
ductive efficiency, but something besides, which some- 
thing is an absolute loss to the agricultural country, 
against which it can only protect itself by discriminating 
duties. 

I must first ask from the reader a- consideration of the 
inherent differences between the nature of the two great 
classes of industry. These differences are : 

1. That agricidture can utilize rmich less capital than 
manufactures in employing a given 'population. 

2. That the efficiency of lahor is everywhere the same^ 
or nearly so in manufacturing^ l)tct very variable in agri- 
culture in different States, on account of the latter effi- 
ciency depending on the national margin of cultivation. 

3. That the efficiency of lahor is uniform in manu- 
factures, hut variahle in agriculture as affected hy the 
vicissitudes of the seasons. 

1. That agriculture can utilize much less capital than 
manufactures in employing a given population. 

The intelligent reader can hardly have failed to an- 
ticipate me in the application here of the principle of the 
constant tendency of capital to outstrip population. It 
follows, from this principle, that a country will always 
possess, very shortly after the need is felt, all the capital 



146 CAPITAL AND POPULATIOiT. 

it can employ at a satisfactory rate of profit. The opening 
np of any new avenue for investment inevitably results 
in an increase of capitalized wealth ; and I have further 
shown that such increase of capital, while it is taking 
place, is always accompanied by an increase of produc- 
tion to several times its own extent, and which contin- 
ues until the new normal ratio of capital to population 
is attained. This result is the necessary consequence of 
the fall in proportional wages and rise in profits that any 
and every opportunity for profitable investment affords. 
The nature of a nation's industries, therefore, as utilizing 
more or less capital in proportion to population, is a vital 
one to its productive efficiency. This element of national 
productiveness has no effect upon its exchange of produce 
with its neighbors. Such exchange is wholly governed 
by the money-cost at which it and they can produce ; and 
into such cost both money- wages and profits enter ; but it 
follows, as a result of our whole argument, that, as a ques- 
tion of national profit and loss, the comparison should 
be sim]3ly between the money-cost of the labor that can 
produce the commodity at home as compared with the 
money-cost of that which produces the articles exchanged 
for the imported commodity. 

To illustrate, let us suppose that in America a day's 
labor on the poorest land will produce wheat of the value 
of $1.65, $1.50 of which is paid as wages, and fifteen 
cents as the profit of circulating capital, at ten per cent, 
and that the product of one's day's labor in manufactur- 
ing woolen cloth will sell for $3.15, composed of $1.50 
for wages, fifteen cents for profit on circulating capital, 
and $1.50 for profit on fixed capital. (For the sake of 
simplicity, I here suppose no fixed capital to be employed 
in agriculture, or, what will amount to the same thing, 



FEEE TRADE AND PROTECTION. 147 

the profit, rent, etc., on the plant in woolen manufact- 
ure to exceed the profit of the agricultural plant hj an 
amount equal to the wages expended in either case. The 
supposition is, of course, an extravagant one, and only 
made for the sake of enforcing the principle.) Let us 
likewise suppose that in England one day's labor on the 
poorest land will produce two thirds of what it will in 
America. Wages will then be one dollar per day, and 
the value of the produce will be $1.10. The money-price 
of wheat would be the same in each country — as it must 
always be — cost of carriage, etc., apart. Cloth, however, 
can be made in England, under otherwise similar condi- 
tions, for $2.10 for the product of a day's labor, one dol- 
lar of which will be wages, ten cents profit on circulating 
capital, and one dollar profit on fixed capital. (This is 
not exactly the proportion in which English fixed capital 
would enter into the price, but it is sufficiently exact for 
the purposes of this discussion. It is exact, as far as Eng- 
lish labor and profits compose the cost of buildings, tools, 
etc., but not as far as raw agricultural products or import- 
ed articles enter into such cost ; in fact, the amount of 
English fixed capital would be larger than I have stated ; 
and such increase, whatever it would be, would entail a 
further loss upon America in excess of that shown by the 
calculation.) America can not import such cloth for less 
than $2.10, and may be forced to pay any price between 
$2.10 and $3.15. 

In Book Y, chapter x, section 1, Mill says : 

" The amount of national loss thus occasioned (by protection) is 
measured by the excess of the price at which the commodity is 
produced over that at which it could be imported." 

According to him, therefore, England gains nothing ; 
for, as we shall see hereafter, cost of carriage, profits of 



148 CAPITAL AND POPULATION. 

importers, etc., apart, prices of agricultural produce must 
be the same in all countries carrying on commerce with 
each other. Her gain consists entirely in the rise in her 
margin of cultivation, caused by her importation of food, 
while America's gain on importing the cloth is $1.05, less 
the loss occasioned by any lowering of her margin of cul- 
tivation. Strictly speaking, the calculation according to 
Mill should take no account of the margin of cultivation, 
as he omitted to notice its effect upon the distribution of 
the gain in productiveness ; as this, however, is probably 
only an error of omission on his part, I give him the 
benefit of it in my argument. 

ISTow, this apparent gain of America is very much 
greater than the benefit to the world by an English la- 
borer being employed in making cloth instead of raising 
wheat, and an American laborer in raising wheat instead 
of making cloth. As it takes the same amount of labor 
in either country to make the cloth, the gain in the 
amount of material products is solely in the increased 
efificiency of the labor employed in growing wheat. By 
the conditions of our problem this gain is fifty cents on 
a day's labor, and, if we accept Mill's method of calcu- 
lating, America, under free trade, gains the w^hole money 
advantage of such trade and fifty-five cents besides, while 
England also gains a substantial advantage in her margin 
of cultivation only partially compensated by a smaller 
loss in her margin to America. This result is too absurd 
to be for a moment entertained. It is simply the claim 
that the parts can be greater than the whole. Tlie fifty 
cents gain is divided into a money gain of $1.05, and 
that resulting from the disturbance of the two national 
marfi^ins of cultivation (this last is also a gain because 
the rise in the English margin, as a matter of fact, is 



FREE TEADE AND PROTECTION. 149 

greater than the fall in the American, on account of the 
great amount of our unoccupied fertile lands) ; nor can 
the dilemma be escajDed bj the claim that the extra fifty- 
five cents of America's gain is due to the money-cost of 
English capital being less than American. That is the 
true explanation of the fact, but, as long as there is no 
gain in the labor-cost of such capital, its money -cost is 
here a matter of indifference. The $1.05, if Mill is 
right, should represent a material benefit, and not a mere 
difference in money values ; but we have seen that fifty 
cents, and the gain through the English margin being 
raised more than the American has been depressed, is the 
extent of the material benefit to the world, and this has 
now become a gain of $1.05, and the gain in the margins 
besides, and free-traders have the further anomaly to ex- 
plain, how it happens that agricultural nations, to whom, 
according to them, more than the whole gain of com- 
merce accrues, remain poor, notwithstanding the greater 
fertility of their soil ; while manufacturing nations, who 
receive none of it, are the richest nations of the earth, 
despite their comparative sterility. 

I^ow, let us consider the problem in consonance with 
the views advanced in this treatise. If America pro- 
tected her woolen manufacture, as soon as she had ac- 
cumulated the requisite capital, she would obtain a day's 
product of cloth with the same labor the product of 
which she formerly sold to England for $1.65 ; but for 
a day's product of English labor she was forced to pay 
$2.10 or over. She, therefore, formerly obtained for 
herself none of the benefit of the increased productive- 
ness of labor, and lost forty-five cents besides, even when 
she obtained her cloth at the least possible price. Eng- 
land, on the other hand, sold to America the product of 



150 CAPITAL AND POPULATION 

a day's labor for $2.10, which would have only brought 
her if employed in agriculture a value of $1.10. She 
formerly, therefore, gained the whole profit in the inter- 
national exchange, and fifty cents besides, forty-five cents 
of w^hich was at the expense of America, and five cents 
represented the profit saved on the extra circulating capi- 
tal necessary to employ an American over an English 
laborer, or, in other words, it is the profit on the addi- 
tional production of fifty cents. The American con- 
sumer does indeed pay $3.15 for an article he could 
import for $2.10, but the gross sum of the national 
profits is larger by $1.50, and the gross revenue of the 
whole people greater by at least forty-five cents, to which 
must be added the gain accruing from the consequent 
rise in the margin of cultivation. 

Let us now change the supposition, and suppose that 
the cost of woolen cloth is composed of profits only to the 
extent of one quarter the sum paid the artisans as wages. 
The cost of a day's product of cloth in England will then 
be $1.35 and its cost at home $2.02J-, the rate of profit, 
as before, being ten per cent alike in both countries. 
America will now gain thirty cents by the interchange of 
commodities, and England twenty cents plus the ia^ve 
cent profit on extra circulating capital, as before. 

It would seem at first sight that America, in this case, 
gained the greater part of the mutual advantage, but that 
is not actually the case ; to really do so, she should gain 
nearly the whole, or at least such part of the fifty cents 
as represents half the real advantage to the world of her 
employing her laborers in agriculture instead of manufact- 
ures. Proper allowance must be made for the effect of 
free trade upon the margin of cultivation. If England 
with her present population was forced to raise all her 



FREE TRADE AND PROTECTIOK 151 

own food, her margin wonld be so low that she wonld 
perhaps produce, with the same amount of labor on her 
poorest lands, only half the produce we now get from our 
poorest lands. This would add twenty-five cents to her 
gain, in the case we have supposed, and make the total 
fifty cents, while a subtraction must be made from Amer- 
ica's apparent gain of thirty cents, to allow for any low- 
ering of her margin, on account of employing more of 
her labor in agriculture. If we suppose that, under pro- 
tection, on the poorest lands then cultivated, ten per cent 
less labor than formerly was required for the same prod- 
uce, her real gain under free trade would be only fifteen 
cents, while England's would be fifty cents ; the gain to 
the world would then be sixty cents, composed of fifty 
cents former difference in the efficiency of labor, plus 
twenty-five cents the gain of England on the rise of her 
margin, and less fifteen cents the loss of America on the 
decline of her margin. (The five cents as before repre- 
sents the profit on the increased production, and affects 
the distribution only, not the creation of wealth.) The 
rate of profit in both being the same, and all other things 
being equal, a manufacturing country will always gain 
the larger proportion of the benefit accruing from trade, 
and, if the article be one into the cost of which profits 
enter largely, it may appropriate to itself more than the 
whole gain, the excess being at the expense of the agri- 
cultural. If the normal rate of profit, as is usually the 
case, is less in the manufacturing than in the agricultural, 
or if the rate in both should be less than the rate we have 
supposed, the actual loss to the latter will be lessened, or, 
as the case may be, her share of the gain to the world 
will be increased, hid it can never quite equal one half 
of such gain. I must not be understood as claiming that 



152 CAPITAL AND POPULATION". 

the element of profit, as affecting cost of production, is 
usually great enougli of itself alone to justify protective 
duties, but only that it lessens very materially the propor- 
tion of the benefits of free trade to an agricultural nation 
as compared with what would accrue on an equal division 
of such benefit, and that, in connection with the effect 
upon the margin of cultivation, the employment of other- 
wise idle labor, the transmutation of common into skilled 
labor, and of effects upon the equation of international 
demand, to be hereafter noticed, it will justify protective 
duties in most of the instances in which they have been 
imposed, if the increase of mere national prosperity be 
accepted as such justification. 

Whether the importation of any article, the equation 
of international demand being even, is actually causing' a 
gain or loss to the country, can be ascertained pretty ac- 
curately by comparing the imp(5Tted cost of such article 
with the labor-cost of producing it at home, together 
with an addition for the profit of circulating capital em- 
ployed. From the result obtained allowance must be 
made for the effect of protecting or importing the article 
upon the margin of cultivation and upon the employ- 
ment of female or other wasted labor, and the substitu- 
tion of highly paid skilled for the lowly paid common 
labor. 

There is no disputing the fact that manufacturing are 
uniformly richer in capitalized wealth than agricultural 
countries, and that, despite their lower margin of cultiva- 
tion, their annual produce is nearly, if not quite, as large 
jper capita. That of England and America is, as nearly 
as can be calculated from statistics, about the same, not- 
withstanding that England's margin is lower than ours by 
over one third. These results must be attributed wholly 



FREE TRADE AND PROTEOTIOK 153 

to moral causes, if Mill's views as to accumulation and the 
distribution of wealth under free trade are accepted ; 
whereas, under the views here presented, they are the 
natural outcome of economic law, and afford a substantial 
verification of the views themselves. While to assert 
that England is richer than we in capitalized wealth, and 
produces annually an equal value ])eT capita^ notwith- 
standing our superior natural resources, because of the 
moral superiority and greater thriftiness of her popula- 
tion, will hardly avail to convince many of the soundness 
of Mill's deductions. 

It may, however, be useful in this connection to again 
quote from the " Principles of Political Economy." In 
Book Y, chapter x, section 1, I find the passage : 

" It was shown, however, in our analysis of tlie effects of inter- 
national trade, as it had been often shown by former writers, that 
the importation of foreign commodities, in the common course of 
traffic, never takes place, except when it is, economically speaking, 
a national good^ by causing the same amount of commodities to be 
obtained at a smaller cost of lahor and capital to the country. To 
prohibit, therefore, this importation, or to impose duties which pre- 
vent it, is to render the labor and capital of the country less efficient 
in production than they would otherwise be, and compel a waste of 
the difference between the labor and capital necessary for the home 
production of the commodity and that which is required for produc- 
ing the things with which it can be purchased from abroad." 

My position is, that while the actual interchange of 
goods under free trade will be in accordance, as is here 
claimed, with the efficiency of both labor and capital, and 
that the interest of the world at large will also be sub- 
served by any increase of the efficiency of its labor, the 
distribution of the advantage depends on other principles, 
and the individual interests of the different nations are 
regulated by other considerations, and that while a nation 



154 CAPITAL AND POPULATION 

loses, as Mill claims, from diverting its labor to industries 
in which it is less efficient, it does not lose by the ac- 
companying diversion of its capital, as such diversion, 
if toward industries employing greater capital than its 
old ones, allows otherwise impossible accumulations to 
be made without depressing, and even for a time in- 
creasing, the rate of profit, and the aggregate amount 
of profits it thus enjoys may be greatly enhanced, and 
that, while a part of such increase of profits will be at 
the expense of the home consumer, it will not all be 
so, but will result in a substantial increase in the net rev- 
enue of the country, sometimes less and sometimes great- 
er, but in all cases to be offset against the loss in the effi- 
ciency of its labor, which we allow will occur, before it 
can be affirmed that a net loss results to such country. 

And the reason that Mill failed to appreciate this re- 
sult of protection can be gathered from the following 
passage from Book I, chapter v, section 1 : 

" Had legislators been aware that industry is limited, ty capital^ 
they would have seen that the aggregate capital of the country not 
having been increased, any portion of it which they by their laws 
had caused to be embarked in the newly-acquired branch of indus- 
try must have been withdrawn or withheld from some other ; in 
which it gave, or would have given, employment to probably about 
(?) the same quantity of labor which it employs in its new occupa- 
tion." 

Industry is not limited by the extent of capital as de- 
fined by himself, but only by the extent of the wages- 
fund or capital in Ricardo's sense. On the contrary, the 
increase of capital, needed for protected industries, is not 
drawn from the wages-fund, but from dead stock, and 
tends to an increase of the wages-fund, because it in- 
creases the rate of profit upon which the amount of capi- 



FREE TRADE AND PROTECTION. 155 

tal in the sense of this quotation — i. e., the wages-fund — 
really depends. The increase is ultimately drawn from 
the products of an increased employment of labor, to 
which the demand for the increase itself inevitably leads. 

'2. That the efficiency of labor is everywhere the 
sa'une^ or nearly so, in manufacturing, hut very variable 
in different States, in agriculture / 07i account of the lat- 
ter efficiency depending on the national margin of culti- 
vation. 

When I say that the efficiency of labor is everywhere 
the same, or nearly so, in manufacturing, I do not mean 
to be understood as denying or belittling the differences 
in the mental and physical efficiency of different races 
and nations of men, but I do mean to say that their com- 
parative natural efficiency in manufacturing and in culti- 
vating lands of the same fertility does not much differ. 
The labor of the rice-fed Chinamen is far less effective 
than that of the Anglo-Saxon, but the degree in which it 
is so in manufacturing is not much different from what 
it is in the cultivation of the soil, except, indeed, as such 
degree of efficiency depends upon specially acquired skill 
resulting from the nature of past activities, and which 
practice in the unaccustomed industries would soon rec- 

tify. 

As Mill says in Book I, chapter vii, section 4 : 

" The third element which determines the productiveness of the 
labor of a community is the skill and knowledge therein existing ; 
whether it he the skill and knowledge of the laborers themselves, or 
of those who direct their labor. No illustration is requisite to 
show how the efficacy of industry is promoted by the manual dex- 
terity of those who perform mere routine processes ; by the intelli- 
gence of those engaged in operations in which the mind has a con- 
siderable part ; and by the amount of knowledge of natural powers 



156 CAPITAL AND POPULATION. 

and of the properties of objects, which is turned to the purposes of 
industry. That the productiveness of the labor of a people is lim- 
ited by their knowledge of the arts of life, is self-evident ; and that 
any progress in those arts, any improved application of the objects 
or powers of nature to industrial uses, enables the same quantity 
and intensity of labor to raise a greater produce." 

But as Mill acknowledges that protective duties are 
defensible for the purpose of acq[uiring such skill and apt- 
itude, I will not dwell upon the point, although he has 
been denounced for this opinion by the more ultra of his 
followers, further than to call attention to the fact that 
the temporary increase of industrial activity, that ensues 
upon the protection of manufactures, itself provides a 
fund more than sufficient for such educational purposes ; 
and to quote the passage from Book Y, chapter x, section 
1, in which he thus expresses himself : 

" The only case in which, on mere principles of political economy, 
protecting duties can be defensible, is when they are imposed tem- 
porarily (especially in a young and rising nation) in hopes of natu- 
ralizing a foreign industry, in itself perfectly suitable to the circum- 
stances of the country. The superiority of one country over an- 
other in a branch of production often arises only from having begun 
it sooner. There may be no inherent advantage on one part, or dis- 
advantage on the other, but only a present superiority of acquired 
skill and experience. A country which has this skill and experience 
yet to acquire, may in other respects be better adapted to the pro- 
duction than those which were earlier in the field; and, besides, it 
is a just remark of Mr. Eae that nothing has a greater tendency to 
promote improvements in any branch of production than its trial 
under a new set of conditions. But it can not be expected that in- 
dividuals should, at their own risk, or rather to their certain loss, 
introduce a new manufacture, and bear the burden of carrying it on 
until the producers have been educated up to the level of those 
with whom the processes are traditional. A protecting duty, con- 
tinued for a reasonable time, will sometimes be the least incon- 
venient mode in which the nation can tax itself for the support of 



FREE TRADE AI^D PROTECTION". 157 

such an experiment. But the protection should be confined to cases 
in which there is good ground of assurance that the industry whicli 
it fosters will after a time be able to dispense with it; nor should 
the domestic producers ever be allowed to expect that it will be 
continued to them beyond the time necessary for a fair trial of what 
they are capable of accomplishing." 

]^or do I overlook the fact that some increase of the 
efficiency of labor engaged in manufactures follows upon 
their concentration in particular localities. As Mill sajs 
in Book TV, chapter ii, section 2 : 

" The larger the scale on. which manufacturing operations are 
carried on, the more cheaply they can in general be performed. 
Mr. Senior has gone the length of enunciating, as an inherent law of 
manufacturing industry, that in it increased production takes place 
at a smaller cost, while in agricultural industry, increased produc- 
tion takes place at a greater cost. I can not think, however, that 
even in manufactures, increased cheapness follows increased pro- 
duction by anything amounting to a law. It is a probable and 
usual, but not a necessary consequence." 

With this passage I fully agree, and what eiiect the 
principle has must be regarded as a deduction from the 
results here obtained, and neglected, not because it is un- 
real, but because it is of no great consequence, and per- 
haps nearly, if not quite, offset by other economic ad- 
vantages, not elsewhere noticed by me, that ensue from 
the dispersion of such industries; as, for instance, the 
greater chance of inventions and improvements being 
made when the same industry is carried on by many 
nations and races, than when it is monopolized by one or 
two only. 

E"or do I at all deny that climate, soil, and the min- 
eral products of a country do, to some extent, affect the 
efficiency of her artisan labor. The climate of Southern 
Europe affords the people there advantages in the pro- 



158 CAPITAL AND POPULATION. 

duction of wine, whicli, from the amount of capital it 
engages, may be economically considered rather as a com- 
modity than as a raw product, and the dampness of her 
atmosphere yields a certain advantage to England in spin- 
ning cotton, and her mines of iron and coal give her a 
natural advantage over her Continental neighbors in the 
efficiency of her artisan labor. The labor-cost is less to 
her than to them, but she does not possess this advan- 
tage over us, as what makes cheap iron and coal, for the 
purposes of this discussion, is not so much the fact that 
they are extracted by cheap, as by little labor. In the 
natural fertility of her mines and their abundance, she 
is inferior rather than superior to America. Being an 
industry in which the employment of capital is large, the 
labor-cost is much more to be considered than the money- 
pricer — 

I grant' at once that no endeavor should be made to 
overcome by means of protective duties any real natural 
advantages in manufacturing, possessed by foreign na- 
tions, and that, unless such advantages are inconsiderable, 
the attempt to overcome them will probably result in a 
national loss. 

I am justified, however, in asserting that what differ- 
ences there are in manufacturing efficiency are mainly 
artificial, and that the process of acquiring them may be 
regarded as educational ; often, indeed, expensive, but 
justified by the result, if followed ultimately by any in- 
crement in the amount of the national produce. 

As to the efficiency of labor in agriculture, the case 
is very different. Equal physical power and intelligence, 
vicissitudes of the seasons apart, will command an equal 
produce only from lands of the same inherent fertility. 
Every variation in the quality of the soil entails a vari- 



FREE TRADE AND PROTECTION. 159 

ance in the crops gathered from it. "When the efficiency 1 
of a nation's agricultural labor is lowered by poorer lands 
being put under cultivation, the efficiency of her labor 
employed upon the lands previously cultivated is not dis- 
turbed, but a different distribution of their produce re- 
sults. ^Neither profits nor proportional wages are caused . 
thereby to vary, but rent is increased at the expense of 
real wages, and the money valne of agricultural produce 
continuing the same, as it may, unless affected by other 
causes, money-wages will also decline to the same extent 
as real. 

Premising this much, I submit to the consideration of 
the reader the following extract from Mill's " Principles," 
Book in, chapter xxv, sections 2 and 4 : 

" Section 2. According to tlie preceding doctrine, a country can 
not be undersold in any commodity, unless the rival country has a 
stronger inducement than itself for devoting its labor and capital 
to the production of the commodity; arising from the fact that by 
doing so it occasions a greater saving of labor and capital, to be i 
shared between itself and its customers — a greater increase of the 
aggregate produce of the world. The underselling, therefore, though 

L- ^ a loss to the undersold country, is an advantage to the world at j 
large ; the substituted commerce being one which economizes more \ 

f ' of the labor and capital of mankind, and adds more to their col- 
lective wealth, than the commerce superseded by it. The advan- 
tage, of course, consists in being able to produce the commodity of 
better quality, or with less labor (compared with other things) ; or 
perhaps, not with less labor, but in less time; with a less prolonged 
detention of the capital employed. This may arise from greater 
natural advantages (such as soil, climate, richness of mines) ; supe- 
rior capability, either natural or acquired, in the laborers; better 
division of labor, and better tools or machinery. But there is no 
place left in this theory for the case of lower wages. This, how- 
ever, in the theories commonly current, is a favorite cause of under- 
selling. We continually hear of the disadvantage under which the 
British producer labors, both in foreign markets, and even in his 



160 CAPITAL AND POPULATIOl!^. 

own, through the low wages paid by his foreign rivals. These 
lower wages, we are told, enable, or are always on the point of 
enabling, them to sell at lower prices, and to dislodge the Enghsh 
manufacturer from all markets in which he is not artificially pro- 
tected. 

"Before examining this opinion on grounds of principle, it is 
worth while to bestow a moment's consideration upon it as a ques- 
tion of fact. Is it true that the wages of manufacturing labor are 
lower in foreign countries than in England, in any sense in which 
low wages are an advantage to the capitalist? The artisan of 
Ghent or Lyons may earn less wages in a day, but does he not do 
less work ? Degrees of eflSciency considered, does his labor cost 
less to his employer? Though wages may be lower on the Conti- 
nent, is not the cost of labor, which is the real element in the com- 
petition, very nearly the same? That it is so, seems the opinion of 
competent judges, and is confirmed by the very little difference in 
the rate of profit between England and the Continental countries. 
But if so, the opinion is absurd that English producers can be un- 
dersold by their Continental rivals from this cause. It is only in 
America that the supposition is frima facie admissible. In Amer- 
ica wages are much higher than in England, if we mean by wages 
the daily earnings of a laborer ; but the productive power of Amer- 
ican labor is so great — its efficiency, combined with the favorable 
circumstances in which it is exerted, makes it worth so much to the 
purchaser — that the cost of labor is lower in America than in Eng- 
land ; as is indicated by the fact that the general rate of profits and 
of interest is higher. 

" But is it true that low wages, even in the sense of low cost of 
labor, enable a country to sell cheaper in the foreign market? I 
mean, of course, low wages which are common to the whole pro- 
ductive industry of the country. 

"If wages, in any of the departments of industry which supply 
exports, are kept artificially, or by some accidental cause, below the 
general rate of wages in the country, this is a real advantage in the 
foreign market. It lessens the comparative cost of production of 
those articles, in relation to others; and has the same effect as if 
their production required so much less labor. 

"Sec. 4. These two cases of slave-labor and of domestic manu- 
factures exemplify the conditions under which low wages enable a 



FEEE TRADE AND PROTECTIOK 161 

country to sell its comraodities cheaper in foreign markets, and con- 
sequentlj to undersell its rivals, or to avoid being undersold bj 
them. But no such advantage is conferred by low wages when 
common to all branches of industry. General low wages never 
caused any country to undersell its rivals, nor did general high 
wages ever hinder it from doing so. 

" To demonstrate this, we must return to an elementary princi- 
ple which was discussed in a former chapter.* General low wages 
do not cause low prices, nor high wages high prices, within the 
country itself. General prices are not raised by a rise of wages, 
any more than they would be raised by an increase of the quantity 
of labor required in all production. Expenses which affect all com- 
modities equally, have no influence on prices. If the maker of 
broadcloth or cutlery, and nobody else, had to pay higher wages, 
the price of his commodity would rise, just as it would if he had to 
employ more labor ; because otherwise he would gain less profit 
than other producers, and nobody would engage in the employment. 
But if everybody has to pay higher wages, or everybody to employ 
more labor, the loss must be submitted to ; as it affects everybody 
alike, no one can hope to get rid of it by a change of employment ; 
each, therefore, resigns himself to a diminution of profits, and prices 
remain as they were. In like manner, general low wages, or a gen- 
eral increase in the productiveness of labor, does not make prices 
low, but profits high. If wages fall {meaning here l)y wages the cost 
oflal)or\ why^ on that account^ should tJie producer lower his price? 
He icill be forced^ it may he said^ by the competition of other cap)i- 
talists who will croiDd into his employment. But other capitalists 
are also pa^ying lower wages^ and by entering into competitio7i icith 
him they would gain nothing hut what they are gaining already. 
The rate, then, at which labor is paid, as well as the quantity of it 
which is employed, affects neither the value nor the price of the 
commodity produced, except in so far as it is peculiar to that com- 
modity, and not common to commodities generally. 

" Since low wages are not a cause of low prices in the country 
itself, so neither do they cause it to offer its commodities in foreign 
markets at a lower price. It is quite true that, if the cost of labor 
is lower in America than in England, America could sell her cottons 

* Supra, Book III, chapter iv. 

I) .v; i - 



162 CAPITAL AND P0PULATI0:N". 

to Cuba at a lower price than England, and still gain as high a 
profit as the English manufacturer. But it is not with the profit of 
the English manufacturer that the American cotton-spinner will 
make his comparison ; it is with the profits of other American capi- 
talists. These enjoy, in common with himself, the benefit of a low 
cost of labor, and have accordingly a high rate of profit. This high 
profit the cotton-spinner must also have ; he will not content him- 
self with the English profit. It is true he may go on for a time at 
that lower rate, rather than change his employment ; and a trade 
may be carried on, sometimes for a long period, at a much lower 
profit than that for which it would have been originally engaged 
in. Countries which have a low cost of labor and high profits, do 
not for that reason undersell others, but they do oppose a more 
obstinate resistance to being undersold, because the producers can 
often submit to a diminution of profit without being unable to 
live, and even to thrive, by their business. But this is all which 
their advantage does for them ; and in this resistance they will 
not long persevere, when a change of times, which may give 
them equal profits with the rest of their countrymen, has become 
manifestly hopeless." 

It is difficult to gather from this passage the sense in 
which Mill "uses the term " wages " ; if he means propor- 
tional wages, what he says in section 2 is true, proyided 
general prices are not affected. If prices are lowered, the 
supposed country is enabled to undersell others in foreign 
markets ; if prices are raised, they are enabled to under- 
sell it. But in the ordinary course of affairs a change in 
general prices affects the rate of proportional wages more 
than any change in money- wages. A rise of prices, 
money-wages remaining the same, lowers the rate, and a 
fall raises it, and to such extent that in times of activity 
the rate is lowered notwithstanding the rise in money- 
wages that then occurs, and in stagnant times the rate is 
raised notwithstanding money- wages being cut down. A 
rise or fall of proportional wages is not a cause of, but is 



FREE TRADE AND PROTECTION. 163 

always accompanied by, becanse it is -usually in part 
caused by, a fall or rise in general prices, and this latter 
does affect the ability to sell or be undersold in foreign 
markets. Mill is here speaking, probably, not of its 
fluctuations, but of the permanent rise of the rate which 
naturally occurs in nations with large accumulations. 
Such rise in proportional wages has, of course, no effect. 
But Mill persistently confounds real and proportional 
wages, and a fall in real wages does profoundly affect the 
ability of a nation to compete in foreign markets. It in- 
creases the efficiency of labor and capital in manufactures 
as compared with that in agriculture. When it occurs in 
a manufacturing nation it -enables her to cheapen the 
manufactured goods which constitute her exports, while 
it lessens to an agricultural people their comparative dis- 
advantage in manufacturing. This results from the fact 
that profits constitute a greater proportion of the cost of 
goods than of raw products. It is true, as Mill says, that 
"general low wages do not cause" (average) "low prices 
nor high wages " (average) " high prices within the coun- 
try itself," but they do affect the relative prices of the 
commodities or products that form the bulk of a nation's 
exports, and do therefore affect its ability to undersell or 
its liability to be undersold. It is, indeed, absurd, as Mill 
says, to assert that a high rate of proportional wages in a 
manufacturing country, like England, enables her com- 
petitors to undersell her in the markets of the world ; but 
it is absurd not for the reason Mill gives, that her ability 
to compete in such markets is not at all affected by the 
increase of the rate, but because the direct contrary of 
the assertion is true, and any increase in her rate of pro- 
portional wages aids her to undersell them in the articles 
of which her exports are mainly composed, because any 



164 CAPITAL AND POPULATION. 

lowering of the rate of profit lowers manufactured goods 
as compared with raw products. Mill says : 

" If wages fall (meaning ly wages tlie cost of lator)^ why, on that 
account, should the producer lower his price ? He will be forced, it 
may be said, by the competition of other capitalists who will crowd 
into his employment ; but other capitalists are also paying lower 
wages, and by entering into competition with him they would gain 
nothing but what they are gaining already." 

This latter assertion is untrue, and is equivalent to 
the denial that a high rate of profit will lead to any in- 
crease in industrial activity. All other capitalists are not 
" also paying lower wages," because many of them are 
not paying any wages at all, or at least are employing 
less labor than they might if they choose to convert more 
of their dead into active stock. This class would most 
certainly " crowd into his," and every other, '' employ- 
ment" on the occurrence of any fall in proportional 
wages, until prices are again lowered by the consequent 
increase of the ratio of capital to population. 

But what does Mill intend by "cost of labor" ? In 
the use of the w^ord by his opponents, the idea is intended 
as applying to money, or real, not proportional wages. 
When it is said that labor is cheap, the meaning is, that 
labor of a given effectiveness can be bought for a small 
amount of money or other commodities. That this af- 
fects the ability of a nation to sell certain classes of 
goods to its neighbors is the only idea intended, and no 
one surely will deny that it does so. Real wages and 
the margin of cultivation mutually depend on each other. 
That real wages are small is because the margin is low, 
and that the margin is low is because the laborer is con- 
tent to increase the population notwithstanding real 
wages being low. 



FREE TRADE AND PROTECTION. 165 

A lowering of the margin of cultivation lias no effect 
npon the increase of agricultural prices. That price (cost 
of carriage, etc., apart) must be the same the world over. 
"When a nation, from any cause, lowers its margin, corn 
will bring no higher price, because, if it did, it would be 
soon undersold by foreign corn, and would remain in the 
granaries of the farmer ; but the farmer can no longer 
sell it at the old price and pay the same money or real 
wages. These will, therefore, very soon be lowered, but 
this v/ill also entail a corresponding lowering of the wages 
of artisans, and, as profits are not affected, of the prices 
of manufactured goods. This will affect the ability of 
the nation to undersell its mamifacturing rivals. All 
that those who complain of " the competition of pauper 
labor" should mean is, that the lowness of their real 
wages prevents us from competing with foreigners in 
manufacturing. They have sometimes complained in 
terms that seemed to imply that such competition tended 
to lower the real wages of our own operatives, and, so far 
as they have done so. Mill is right in dismissing their 
complaint, and also right in asserting that (except as the 
equation of international demand is affected) the gen- 
eral ability to sell in foreign markets is not affected 
by the proportion between wages and profits. When, 
however, he draws the implication from his argument 
that the ability to sell particular classes of commodities 
is not affected, he is as certainly wTong, and, however 
he has understood his opponents, and however loosely 
they have expressed themselves, this is all that is really 
necessary to the argument in favor of protection, show- 
ing as it does that if there is any inherent benefit to a 
nation, other things being equal, in diverting its indus- 
try from agriculture to manufactures, such advantage 



166 CAPITAL AND POPULATION. 

can not be realized if an unrestricted international inter- 
change is allowed. 

I have already proved that such an advantage exists, 
but it may not be useless to again do so by another illus- 
tration : 

Let us suj)pose, then, two peoples of equal population, 
say of one million laborers, with an equal rate of profit, 
say ten per cent ; the margin of cultivation in one being 
so much lower than in the other that, by an equal amount 
of physical effort on the poorest lands of each, only half 
the produce of the other was obtained by the more sterile 
nation. Let us further suppose that the amount of gold 
in each was such that a bushel of wheat brought the same 
price in both (which result would be a necessary conse- 
quence of their trading with each other a short time, what- 
ever the original distribution of gold). Now, let us suppose 
these nations to be completely isolated from each other 
and from all the world, and the problem is, to ascertain how 
the annual product of one would compare with that of the 
other, and then to ascertain how interchanging commodi- 
ties wil] affect them. If we take it for granted, as would be 
nearly the case, that the consumption of food would be the 
same in each, the more fertile would employ a larger pro- 
portion of its labor as artisans than the other. Let us sup- 
pose that two fifths of its population raise its food, the 
remaining three fifths will be engaged in manufactures. 
In the more sterile, four fifths will then be employed in 
farming and only one fifth as artisans, leaving rent for 
the moment out of the account. The richer country 
will produce annually two fifths more than the sterile of 
material commodities, less the excess of the agricultural 
rent of the sterile over that of the fertile country, and 
this excess (of two fifths less rent) will be wholly in manu- 



FREE TEADE AND PEOTECTIOK 1G7 

factured commodities. What tlie excess of rent will be, 
can not be calculated. It might be very little, or even in 
favor of the more fertile country, but it could hardly be 
so great as to entirely absorb the difference in the pro- 
ductive capacity of the two nations. Let us suppose it 
to be one fifth, although one tenth would probably be a 
liberal estimate. The fertile nation would then be only 
twenty per cent better off than the sterile in its produc- 
tive efficiency, and the latter would employ three fifths 
of its population in raising food and two fifths in manu- 
facturing. 

The exchangeable or gold value of their produce 
would, however, vary much more. Supposing profits in 
both at ten per cent, and that, on the average, manufact- 
ures employed an excess of plant over farming equal to 
twice the annual amount of manufacturing wages, the 
gold value of the product of three hundred working days 
(wages being one dollar in the sterile, and two dollars in 
the fertile land) would be as follows : 

IJSr THE FEETILE COUNTEY. 

Wages of 400,000 men 300 days, at $2.00, in 

agriculture , $240,000,000 

Wages of 600,000 men 300 days, at $2,50, in 

manufactures 450,000,000 

(I here suppose the skilled labor of artisans 

to be worth twenty-five per cent more than 

unskilled agricultural labor.) 

Profits on circulating capital 69,000,000 

Profits on fixed capital 90,000,000 

Profits on rentals 6,000,000 

Pent (assumed) 60,000,000 

$915,000,000 

For convenience in calculating, I assume the rental to 
be paid in advance by the farmer. 



168 CAPITAL AND POPULATIOK 

IN THE STEEILE COUNTEY. 

Wages of 600,000 men 300 days, at $1.00, in 

agriculture • $180,000,000 

Wages of 400,000 men 300 days, at $1.25, in 

manufactures 150,000,000 

Profits on circulating capital 33,000,000 

Profits on fixed capital 30,000,000 

Profits on rentals 12,000,000 

Rent, by supposition one fifth the value of 
300,000,000 days' agricultural labor in 
addition to the rental of the fertile coun- 
try 120,000,000 



$525,000,000 



This excess of $390,000,000 in the gold value of its 
products does not express, however, the real advantage 
in material things that the fertile country possesses. The 
gold value and the real amount of the agricultural prod- 
uce is the same, agricultural profits, wages, and rent to- 
gether amounting to the same sum, $330,000,000. The 
gold value of manufactured goods is, however, twice as 
great in the fertile as in the sterile country ; her real 
advantage is, therefore, less than these figures show. 
The real amount is the product of 200,000 laborers 
employed as artisans for 300 days, together with the 
profits of the fixed and circulating capital. "With profits 
and wages as supposed, the value of such product in the 
fertile country would be $195,000,000, or $97,500,000 
in the sterile. 

]^ow let us suppose these countries to commence trad- 
ing together. At first the sterile nation would export 
goods and import gold; w^hen that had affected prices 
sufiiciently, it would commence to import food and raw 
products also, and to divert its labor from agriculture to 



FEEE TRADE AND PROTECTION. 169 

manufactures, while industry in the fertile country would 
take the reverse direction. If population remained sta- 
tionary and there were no cost of carriage to be considered, 
the ultimate result would be that the margin of cultiva- 
tion would be the same in both countries, except such 
small difference as would lead the sterile country to con- 
tinue importing food, which we will disregard. If we 
further suppose the gradation in the fertility of the lands 
previously cultivated to be the same in both, the sterile 
country would have previously cultivated twice the land 
that the fertile did, less the difference expressed by its 
greater rental, which we have assumed as half such excess. 
The sterile country would then attain the same margin 
by throwing the poorest third of her land out of cultiva- 
tion, if we suppose, as would probably be the case, that, 
on account of the abundance of her fertile land, the in- 
crease of agricultural industry did not lower the margin 
in the fertile country. 

The sterile land would now employ two fifths of its 
labor agriculturally and three fifths in manufactures, and 
the fertile only two fifths as artisans and three fifths as 
farm-hands ; its artisans being then employed in the 
coarser manufactures, requiring but little capital, which 
circumstance, though greatly assisting my argument, I 
will leave out of the calculation. 

Money, real and proportional wages, would now be 
the same in both countries. Prices of both raw products 
and goods would also be the same, except, of course, 
to such extent as would lead to a continuance of com- 
mercial relations, which difference I disregard in the 
calculation below. Let us compute the real, now also 
the exchangeable, value of the annual product of the 
two nations : 



170 CAPITAL AND POPULATION. 

THE FERTILE COUNTRY. 

Wages of 600,000 men 300 days, at $1.60, in 

agriculture $288,000,000 

(The money value of a day's wages will be 
such that the joint product of the two coun- 
tries will have the same money value as be- 
fore, as no increase or decrease of gold has 
occurred. The rates here supposed bring 
about this result as nearly as any that could 
be conveniently used.) 
Wages of 400,000 men 300 days, at $2.00, in 

manufactures 240,000,000 

Profits on circulating capital 52,800,000 

Profits on fixed capital 48,000,000 

Profits on rentals 6,000,000 

Rent as before 60,000,000 

$694,800,000 

THE STERILE COUNTRY. 

Wages of 400,000 men 300 days, at $1.60, in 

agriculture $192,000,000 

Wages of 600,000 men 300 days, at $2.00, in 

manufactures 360,000,000 

Profits on circulating capital 55,200,000 

Profits on fixed capital 72,000,000 

Profits on rentals _. 6,000,000 

Eent, now only 60,000,000 

$745,200,000 

The total production of the sterile country is now 
greater than that of the fertile by a value of $50,400,000, 
which, divided by $2.60 (the cost in profits and wages of 
a day's product of artisan labor), gives the material product 
of 19,384,615 days of artisan labor ; whereas the relative 
advantage formerly belonged to the fertile country to the 
extent of 60,000,000 days of such labor. The total rela- 
tive gain of the manufacturing country is 79,384,615 days 



FREE TRADE AND PROTEOTIOK 171 

of artisan labor, but tbe total gain to tliem both bj their 
intercourse can not be more than the gain in efficiency of 
the 200,000 laborers transferred from manufacturing to 
agriculture in the fertile country. This gain is of half 
their labor, and amounts to the products of 30,000,000 
days' labor employed in agriculture, which is equal to 
24,000,000 days of artisan labor. The manufacturing 
country has obtained, as the fruits of free trade, and 
solely at the expense of the agricultural, the products of 
55,384,615 days of artisan labor, and the whole gain, be- 
sides, of the increased efficiency of the united labor of 
them both. 

I have supposed, of course, an extreme though per- 
fectly permissible case. As the effect of the intercourse, 
population would advance so as to keep the margin of 
cultivation considerably lower in the sterile country than 
in the fertile, and as far as this happened her relative and 
absolute gain would be lessened. The rate of profit, the 
comparative efficiency of labor in manufacturing, the 
equation of international demand, with its consequent 
indebtedness of the fertile to the sterile nation, would all 
affect the result, and none of these causes can be so ap- 
proximately estimated as to give any value to computa- 
tions based upon them, I will only say of them that the 
equation of international demand, as we shall hereafter 
see, will also tend to the benefit of the manufacturing 
nation, and that any lowering of the margin of cultiva- 
tion in the agricultural land will be an added detriment 
to it and to the world, so that, in practice, whenever the 
two margins became the same, the loss of the latter coun- 
try through free trade would be much greater, and the 
gain to the world less, than I have figured. 

The results I have obtained in my calculations are in- 



172 CAPITAL AND POPULATION. 

explicable if Mill is right as to the distribution of advan- 
tage under free trade. He certainly is right, however, if 
his views as to capital, here combated, are correct. In 
Book III, chapter xviii, section 2, he says : 

" It is even possible to conceive an extreme case, in wMch the 
whole of the advantage resulting from the interchange would be 
reaped by one party, the other country gaining nothing at all." 

He is here discussing the equation of international de- 
mand, and what he says is true as affecting that question, 
but is certainly less than true as affecting international 
trade, as we have seen in the instance supposed. He 
everywhere assumes, and sometimes distinctly asserts, 
that the effect of international exchange upon the distri- 
bution of wealth can not exceed the limits of the in- 
creased product that results from the same cause- 
In this variance of my view from that of Mill I find 
that I, rather than he, am sustained by the authority of 
Ricardo. The appeal to his decision can not be very 
definite, as the point had not then arisen in the discus- 
sion of the subject ; but, in his whole chapter on foreign 
trade, Ricardo scrupulously, and with apparent care, dis- 
cusses the subject of international exchange in terms of 
labor only, whereas Mill as carefully does so in terms of 
both labor and capital. Kicardo's exemplification of the 
subject contains absolutely nothing in conflict with the 
views here set forth, although there is much in these 
views not to be found in his pages. He considers the 
sole advantage of foreign trade to consist in the exchange 
of the products of a smaller for those of a larger amount 
of labor, without any regard to the profits of capital. 
Mill considers it to consist in the exchange of a smaller 
amount of money-wages and profits for what would other- 
wise cost a larger amount of money- wages and profits ; 



FREE TEADE AKD PROTEOTIOISr. 1Y3 

while I hold that the comparison must be made between 
the labor expended on the products exchanged for the 
imported commodity, and the labor that could have pro- 
duced such commodity at home. My view, therefore^ 
almost coincides with that of Ricardo, and the weight of 
his authority is decidedly against Mill. 

Ricardo also distinctly acknowledged, although he 
did not pursue the subject to its conclusion, that the dis- 
tribution between the two nations of their joint product 
may be to the absolute disadvantage of one of them, not- 
withstanding an increase of such joint product. In chap- 
ter XXV, on " Colonial Trade," p. 205, he says : 

" That tlie loss sustained througli a disadvantageous distribution 
of labor in two countries maybe beneficial to one of them, while the 
other is made to suffer more than the loss actually belonging to such 
a distribution, has been stated by Adam Smith himself; which, if 
true, will at once prove that a measure which may be greatly hurt- 
ful to a colony may be partially beneficial to the mother-country." 

Here is a most positive accordance with my view, and 
a disagreement from that of Mill. The wonderful de- 
ductive power of Ricardo's mind preserved him from 
most of Mill's errors. Starting from capital as he de- 
fined it, I find little in his work to object to, except the 
definition of capital itself, and the fact that occasionally 
he has used the term in a broader signification than his 
definition allows. It is Mill, and not I, who differs from 
him, because he has applied Ricardo's deductions to a 
definition of capital not contemplated by him, and from 
which the deductions by no means follow, or were in- 
tended by Ricardo to follov/. 

While, therefore, the proportional cost of labor to 
some extent determines the nature of a nation's indus- 



174 CAPITAL AND POPULATIOK 

tries, the real or money cost does so to a mucli greater 
degree ; and I am entitled to affirm that a high rate of 
real or money wages diverts the industry of a nation into 
those channels where it derives the least benefit from the 
use and increase of its capital, and where its labor is 
more wastefnlly, because more unskillfully, applied. 

3. That the efficiency of labor is imifoTm in manu- 
facttires^ hut "varictble in agriculture as affected hy the 
vicissitudes of the seasons. 

This difference between agriculture and manufactures 
will be of importance later on, as affecting the equation 
of international demand, and is only noted here to pre- 
serve the symmetry of the argument. 



CHAPTER XI. 

THE EQUATION OF INTERNATIONAL DEMAND. 

In the discussion of this question, Mill, in Book III, 
chapter xviii, section 4, says : 

"If, therefore, it be asked what country draws to itself the great- 
est share of the advantage of any trade it carries on, the answer 
is, the country for whose productions there is in other countries the 
greatest demand^ and a demand the most susceptible of iricrease from 
additional cheapness. In so far as the productions of any country 
possess this property, the country obtains all foreign commodities at 
less cost. It gets its imports cheaper, the greater the intensity of 
the demand in foreign countries for its exports. It also gets its im- 
ports cheaper, the less the extent and intensity of its own demand 
for them. The market is cheapest to those whose demand is small. 
A country which desires few foreign productions, and only a limited 
quantity of them, while its own commodities are in great request in 
foreign countries, will obtain its limited imports at extremely small 
cost— that is, in exchange for the produce of a very small quantity of 
its labor and capital." 

With all of which I, of course, agree. When, how- 
ever, in section 8, in further elucidation of the subject, 
he says — 

" The only general law, then, which can be laid down, is this. 
The values at which a country exchanges its produce with foreign 
countries depend on two things : First, on the amount and extensi- 
bility of their demand for its commodities, compared with its de- 
mand for theirs ; and, secondly, on the capital which it has to spare, 



176 CAPITAL AITD POPULATION". 

from the production of domestic commodities, for its own consump- 
tion. The more the foreign demand for its commodities exceeds its 
demand for foreign commodities, and the less capital it can spare to 
produce for foreign markets, compared with what foreigners spare 
to produce for its markets, the more favorable to it will be the 
terms of interchange ; that is, the more it will obtain of foreign 
commodities in return for a given quantity of its own. 

"But these two influencing circumstances are in reality reducible 
to one ; for the capital which a country has to spare from the pro- 
duction of domestic commodities for its own use is in proportion to 
its own demand for foreign commodities; • whatever proportion of its 
collective income it expends in purchases from atroad^ that same pro- 
portion of its capital is left without a home marhet for its produc- 
tions. The new element, therefore, which, for the sake of scientific 
correctness, we have introduced into the theory of international val- 
ues, does not seem to make any very material difference in the prac- 
tical result " — ■ 

I do not wholly follow him. He must surely be wrong 
when he affirms, " Whatever proportion of its collective 
income it expends in purchases from abroad, that same 
proportion of its capital is left without a home market for 
its productions." This would only be true of a nation 
whose exports were equally composed of goods and raw 
produce, or rather of one the value of whose exports 
was composed of profit to the same degree as its articles 
for home consumption. But we have seen that the nature 
of a nation's industries and exports depends mainly upon 
its margin of cultivation. An over-populated country 
will export a much larger proportion of articles, the price 
of which is due largely to profits, than an under-populated. 
A mutual and equal decrease of demand between them 
will, therefore, liberate less labor and more capital in the 
manufacturing than in the agricultural country. This 
will lower profits and decrease production in the former, 
and raise profits and increase production in the latter, 



THE EQUATION OF INTERNATIO^I^AL DEMAND. 177 

until the ratio of capital to population is readjusted. 
Conversely, a mutual and equal increase of demand will 
raise profits and increase production in the former, and 
lower profits and decrease production in the latter. A 
growing trade between them will result in a larger pro- 
portion of benefit to the manufacturing and smaller pro- 
portion of benefit to the agricultural nation. To illus- 
trate, let us suppose that the value of the exports of 
America to England, being mainly raw produce, is com- 
posed of eighty per cent wages and twenty per cent prof- 
its, the value of her articles of home consumption being 
seventy per cent wages and thirty per cent profits, while 
the value of England's exports to America, mainly highly 
manufactured goods, is composed fifty per cent of wages 
and fifty per cent of profits, her articles of home consump- 
tion being of sixty-five per cent wages and thirty-five per 
cent profits. On a decrease of trade between the two 
nations, England w^ould be obliged to employ sixty-five 
laborers to utilize the same capital that formerly employed 
only fifty, while America would have to employ only sev- 
enty to utilize the capital that formerly employed eighty. 
I think I have conclusively shown that the eifect of this 
would be, through the competition of capital in England, 
to raise proportional wages there, and to lower them in 
America through the competition of laborers. This could 
not but lead to a decrease in the industrial activity of 
England, and an increase in that of America. 

'^ These two influencing circumstances " are not there- 
fore really reducible to one. A mutual and equal de- 
crease of demand would, in some degree, afffect the equa- 
tion of international d-eexiand between England and Amer- 
ica, as it would certainly tend to lower the price of Eng- 
lish commodities and raise the price of American — a re- 



178 CAPITAL AND POPULATION, 

suit, as far as it goes, beneficial to us, while an increase 
in such demand would have a contrary tendency, and be 
in some degree hurtful to American interests. The more 
extensive, therefore, the commerce that is carried on be- 
tween England and America, the more will the equation 
of international demand incline in favor of the former, 
because, as Mill says : 

" The less capital it (a nation) can spare to produce for foreign 
markets, compared with what foreigners spare to produce for its 
markets, the more favorable to it will be the terms of interchange." 

Later on, in Book Y, chapter x, section 1, Mill ac- 
knowledges this effect, though for somewhat other rea- 
sons than those here advanced. With those reasons I 
agree, and quote the passage as illustrating another and 
admitted advantage that may result from protection, and 
which, although not of itself sufficient to justify that pol- 
icy, augments, in no inconsiderable degree, the sum of 
the various advantages which are, in most instances, its 
complete justification : 

"Those who have not well considered the subject are apt to 
suppose that our exporting an equivalent in our own produce, for 
the foreign articles we consume, depends on contingencies — on the 
consent of foreign countries to make some corresponding relaxation 
of their own restrictions, or on the question whether those from 
whom we buj are induced by that circumstance to buy more from 
US ; and that if these things, or things equivalent to them, do not 
happen, the payment must be made in money. Now, in the first 
place, there is nothing more objectionable in a money payment than 
in payment by any other medium, if the state of the market makes 
it the most advantageous remittance ; and the money itself was first 
acquired, and would again be replenished, by the export of an 
equivalent value of our own products. But, in the next place, a 
very short interval of paying in money would so lower prices as 
either to stop a part of the importation, or raise up a foreign demand 



THE EQUATION OF INTEENATIONAL DEMAND. 179 

for our produce sufficient to pay for the imports. I grant that this 
disturbance of the equation of international demand would be in 
some degree to our disadvantage, in the purchase of other imported 
articles; and that a country which prohibits some foreign commodi- 
ties does^ cceteris paribus, obtain those which it does not prohibit^ at a 
less price than it would otherwise have to pay. To express the 
same thing in other words: a country which destroys or prevents 
altogether certain branches of foreign trade, thereby annihilating a 
general gain to the world, which would be shared in some propor- ""^(^ 
tion between itself and other countries, does, in some circumstances, 
draw to itself, at the expense of foreigners, a larger share than 
would else belong to it of the gain arising from that portion of its 
foreign trade which it suffers to subsist. But even this it can only 
be enabled to do, if foreigners do not maintain equivalent prohibi- 
tions or restrictions against its commodities." 

Again, in Book III, chapter xviii, section 8, Mill goes 
on to say : 

" It still appears that the countries which carry on their foreign 
trade on the most advantageous terms are those whose commodi- ' 
ties are most in demand by foreign countries, and which have them- 
selves the least demand for foreign commodities. From which, 
among other consequences, it follows that the richest countries, 
ccBteris paribus, gain the least by a given amount of foreign com- 
merce ; since, having a greater demand" for commodities generally, 
they are likely to have a greater demand for foreign commodities, 
and thus modify the terms of interchange to their own disadvantage. 
Their aggregate gains by foreign trade, doubtless, are generally 
greater than those of poorer countries, since they carry on a greater 
amount of such trade, and gain the benefit of cheapness on a larger 
consumption ; but their gain is less on each individual article con- 
sumed." 

We fail to see that this necessarily follows. The pro- 
portion of a nation's income which will be expended upon 
imported commodities does not so much depend upon 
the gross amount of such income, nor upon the average 
income per capita of her population, as upon the greater 



180 CAPITAL AND P0PULATI0:N". " ^ 

or less variety of her own products, which is always less 
in agricultural than in manufacturing countries. If we 
suppose three nations one of whom was willing and able 
to import a value of $100,000,000, and the other two 
only $80,000,000 each, it is perfectly conceivable that the 
rich nation might exchange $50,000,000 with each, and 
they $30,000,000 with each other, and the equation not 
be at all affected thereby. If the richer nation desired 
to import $110,000,000, whether she could do so, without 
affecting the equation, would depend entirely upon the 
willingness of the others to transfer their demand from 
each other to her. If, indeed, one nation should demand 
all the exportable produce that other nations could spare, 
the equation would be affected disastrously for her, but 
this could not occur simply from the greater wealth of 
any nation, but also from its increase of territory, in 
which case, owing to the increase in the variety of its 
own industries, the proportion of its demand for foreign 
products would be correspondingly lessened. 

But it is not always true that the aggregate demand of 
rich countries (by which is here meant, countries of large 
capital in proportion to their population) is greater than 
that of poorer ones. The demand is likely to be not in 
proportion to the capital, but to the annual produce, of 
different nations. England is far richer than we, but her 
annual produce ])er cctjjita is supposed to be about the 
same. As affecting our trade with her, little or no effect 
upon the equation can be attributed to the comparative 
w^ealth of the two nations. 

The equation is, however, profoundly affected by the 
proportion in which the total income of the two countries 
is divided between the wages and capitalist classes. As 
a country engages in manufacturing chiefly because its 



THE EQUATION OF INTEKNATIONAL DEMAND. 181 

margin of cultivation is low, its real wages and total 
wages- fund will be considerably less than the real wages 
and wages-fund of an agricultural country. 'Now, it will 
not be disputed that the larger the income of any indi- 
vidual, the smaller the proportion of it will be expended 
by him for food, and the larger for manufactured goods. 
The average incomes of American laborers are much 
larger than the . average incomes of English laborers. 
Their demand will, therefore, be somewhat greater for 
manufactured goods. The English capitalists enjoy on 
the average a greater income and a greater gross sum of 
profits than the American ; and, consequently, a larger 
proportion of their demand will be for goods and a smaller 
for food. In each country the relatively preponderating 
class will exert a proportionally larger demand for Eng- 
lish goods than they will for American products. This 
can not but result in the demand for English products 
being greater than the demand for American,^ and must 
incline the equations very considerably in England's fa- 
vor. It can be stated, as a general law of international 
demand, that the demand of a country with a low margin 
of cultivation for the products of a country with a high 
margin will be less than the reciprocal demand for its 
goods by the other, and, cwteris parihtcs, the greater share 
of the benefit of their mutual intercourse will accrue to 
the more sterile country. 

I would refer to the following passage from Mill's 

* Whether the greater demand for English goods comes from America 
or England makes no difference, as the greater the English demand for her 
own goods the less she can spare of them for export. It is the total de- 
mand which will sustain the prices of English goods somewhat above what 
would otherwise be their natural level, and correspondingly depress the 
prices of American produce, and it is through these prices that the equa- 
tion of international demand would be affected and expressed. 



182 CAPITAL AND POPULATION. 

" Principles," as explaining and elucidating international 
demand, Book III, chapter xx, section 3 : 

^' From the preceding considerations, it appears that those are 
greatly in error who contend that the value of money, in countries 
where it is an imported commodity, must be entirely regulated by 
its value in the countries which produce it, and can not be raised 
or lowered in any permanent manner unless some change has taken 
place in the cost of production at the mines. On the contrary, any 
circumstance which disturbs the equation of international demand 
with respect to a particular couutry, not only may, but must, affect 
the value of money in that country — its value at the mines remain- 
ing the same. The opening of a new branch of export trade from 
England ; an increase in the foreign demand for English products, 
either by the natural course of events or by the abrogation of duties ; 
a check to the demand in England for foreign commodities, by the 
laying on of import duties in England or of export duties elsewhere 
— these, and all other events of similar tendency, would make the 
imports of England (bulhon and other things taken together) no 
longer an equivalent for the exports; and the countries which take 
her exports would be obliged to offer their commodities, and bullion 
among the rest, on cheaper terms, in order to re-establish the equa- 
tion of demand ; and thus England would obtain money cheaper 
and would acquire a generally higher range of prices. Incidents 
the reverse of these would produce effects the reverse — would re- 
duce prices ; or, in other words, raise the value of precious metals. 
It must be observed, however, that money would thus be raised in 
value only with respect to home commodities ; in relation to all 
imported articles it would remain as before, since their values would 
be affected in the same way and in the same degree with its own. 
A country which, from any of the causes mentioned, gets money 
cheaper, obtains all its other imports cheaper likewise." 

I have heretofore been discussing the question of free 
trade or protection under the supposition that the equa- 
tion of international demand did not operate unfavorably, 
to agricultural nations ; but we now see that a further ad- 
dition to the possible benefits of protection, beyond those 



\ 



THE EQUATION OF INTERNATIOi^AL DEMAND. 183 

already enumerated, is to be found in the fact that pro- 
tection tends to adjust that equation more to the advan- 
tage of an agricultural country. Even if, under free 
trade, such country suffered no loss in the gross amount 
of its profits, and from its labor being diverted from 
highly paid and skilled to more poorly paid and unskilled 
industries, and from its female labor being less utilized, it 
could still hope for little or none of the benefit accruing 
from the greater efiiciency of its own labor, as its just 
share of this benefit v^ould be all or nearly all transferred, 
by the operation of the lav^s of international demand, to 
the manufacturing nations with which it traded. 

I have thus far been exclusively considering the com- 
mercial intercourse that takes place between civilized 
nations, in which the augmentation and application of 
capital are afi:ected only by economic and not by moral 
causes, at least to any appreciable degree. It may be well 
in this connection to consider the effects of free trade be- 
tween two such countries as England and India. The 
margin of cultivation in India is much lower than in 
England, and yet she remains an agricultural land, and 
depends upon the latter very largely for her manufactured 
goods. Ostensible profits are very high. This is largely 
owing to the insecurity of capital, but, after every deduc- 
tion is made on that account, the real rate of profit is un- 
doubtedly higher than in England. Under a natural and 
civilized state of affairs she would manufacture for Eng- 
land, and not England for her, despite this last circum- 
stance. Why does she not do so ? There are no eco- 
nomic reasons, except her disadvantage in the cost of coal, 
which is very far from balancing her advantage in the 
low money and real cost of her labor, and that there, as 
in most uncivilized countries, population presses upon 



184 CAPITAL AND POPULATIOK. 

capital instead of capital upon population. Her seasons 
of industrial depression are never the result of a plethora 
of dead stock, but of an actual insufficiency of all her 
stock to support her laborers from harvest to harvest ; and 
although I have not the statistics at hand to prove the as- 
sertion, and doubt whether such statistics exist, I venture 
to assert that in such periods her rate of profit, if it could 
be ascertained, would be found to advance instead of to 
recede, as it does in civilized nations, in their periods of 
depression. That population presses upon capital is the 
effect wholly of moral causes, but it renders India phys- 
ically incapable of accumulating the capital required for 
manufacturing. If the security afforded by English rule 
leads gradually to an increase in the desire to accumulate, 
and her capital once gains a foothold in manufacturing, 
it will not be long before England will be forced to shut 
out her competition by protective duties, as, I understand, 
she practically does now by discouraging, by every means 
in her power, any diversion of Indian industry from agri- 
culture to manufactures. 

While the rate of profit in India is higher than in 
England, the share of the gross product that accrues to 
capital is less, because her fixed capital and dead stock are 
many times less than her circulating, while in England 
the fixed is several times the amount of circulating wealth. 
On account of the scarcity of the precious metals there, 
exchange between the two countries should be in favor 
of India, and for a long time was so, as w^as shown by 
her continued import of silver. Lately, however, the 
exchange has turned in England's favor, and it has done 
so on account of the extent of the remittances from India 
to England as interest on English capital there invested. 
Whatever benefit India derives from such investments is 



THE EQUATION OF INTERNATIONAL DEMAND. ■ 185 

subject to the serious drawback of the disturbance of the 
exchange and equation to her injury. If, therefore, Eng- 
lish capital should be further invested in manufacturing 
in India, the result would be a further disturbance of the 
equation that would leave to India little or none of the 
benefit of having factories established in her midst. 'Now 
there is a positive loss to the world in England's manu- 
facturing for India. There would be a great gain in in- 
dustrial efficiency if India should divert some of her 
labor from agriculture to manufactures, and England or 
some other country transform an equivalent number of 
her artisans into agriculturists. Mill must, therefore, be 
WTong when he asserts that the equation of international 
demand can only vary within the limits of the advantage 
to the world afforded by free trade, as the equation is 
here in favor of England, notwithstanding a loss to the 
world of productive efficiency. Any tribute paid by one 
country to another, whether in the shape of a tax or of 
the interest and profit of invested capital, affects the 
equation to the injury of the paying nation, independent 
of any other cause or limit. 

The advantage which England derives from her con- 
quest of India is not only the profit of the ensuing trade, 
but also the opportunity afforded her for investment 
there, which, by draining off English capital, has not only 
added to her income the interest and profits of such cap- 
ital, which otherwise she could not have accumulated, 
but has also, by sustaining the rate of profit at home, 
enabled her to increase her industrial activity and the 
amount of her annual product. She has supplanted w^ith 
her own capital the capital which India would naturally 
have accumulated if she had enjoyed a like security under 
her OAvn rulers, and, in so far as she has done so, she has 



186 CAPITAL AND POPULATION. 

absorbed at the expense of India the benefits of tlie secu- 
rity she has conferred upon her. 

As long as the equation of international demand be- 
tween the two countries remains as it is, the value of the 
home commodities of India can not advance and may 
recede, and the value of her imported commodities can 
not recede and may advance. But the implication in 
what I have heretofore said, that the equation is equalized 
when gold or silver ceases to pass between two countries, 
is untrue. The flow of specie or bullion stops wdien any 
equilibrium of demand is reached, however disadvanta- 
geous such equilibrium may be to one of the countries. 
The equation is only really equal when there is an equal 
division of the benefits of the international exchange. 
England at present derives in her commerce with India 
all or nearly all of this benefit ; indeed, the assertion may 
be hazarded that she enjoys more than all, and yet the 
equation has reached an equilibrium or rather yet inclines 
to the favor of England — whereas the bulk of the benefit 
would naturally go to India, until the consequent influx 
of specie had raised the prices of her raw produce nearly 
to the same level as prices of raw produce in England. 
If India should protect her own (not borrowed) capital, 
invested in factories, this state of affairs would quickly 
cease. Her demand on England would be lessened, and 
the equation readjusted in her favor, and it would not at- 
tain an equilibrium until she had received her proper share 
of the metallic currency of the world. In her case the 
benefits of a protective policy would not be liable to any 
offset on account of a loss in the efficiency of her labor, 
as it would result in a positive gain in this respect. But 
when, as the result of protection, her manufacturers were 
once firmly established, her interests would be advanced 



THE EQUATION OF INTERNATIONAL DEMAND. 187 

by the general adoption of free trade, as slie would then 
be able to undersell in manufactures most of the nations 
of the earth, and appropriate to herself those indus- 
tries that allow the utilizations of the largest capitals 
and the employment of her labor in the better paid 
avocations, and which employ female labor to the greatest 
degree. 

There is little danger to European nations of India 
pursuing any such course. England will not allow her 
to do so, as long as she is able to control her action, and 
the anarchy that would follow a release from English 
rule would yet more effectually prevent it. But, while 
India is helpless, China and Japan are not. They have 
already entered upon an industrial competition with 
Europeans, and have driven them from every field 
upon which they have entered as competitors. China is 
now doing all her own sea-board carrying-trade, and has 
even established a steamship line to our shores. She 
and Japan also will soon be erecting cotton, silk, and 
woolen mills, and, when they do, competition with them 
by English and American labor will be utterly futile 
under free trade. They will as certainly monopolize our 
markets as their own. Their margin of cultivation is 
too low for us to contend with them in the most desir- 
able departments of human endeavor. When they have 
adapted their capital and population to the new econom- 
ic conditions, they will obtain for themselves not only all 
the benefit of the increased efficiency of labor, but much 
more, at our expense ; until, finally, our more rapid in- 
crease of population shall have reduced our margin to 
theirs, and reduced the moral and physical status of our 
laboring population to that of their coolies. The re- 
morseless competition of free trade will bestow more 



188 CAPITAL AND POPULATION^. 

than all the advantages of international intercourse upon 
the lowest and least developed races of mankind. 

Returning again to the consideration of the exchange 
between civilized nations, I would call attention to an- 
other circumstance affecting the equation between manu- 
facturing and agricultural nations, viz., the third inher- 
ent difference I have noted in the last chapter between 
the efficiency of the two kinds of labor. I then said : 

"<?. That the efficiency of labor is uniform in manufactures^ tut 
'caridble in agriculture^ as affected ty the vicissitudes of the seasons^ 

It is a fully conceded fact that the adjustment of the ' 
equation of demand and supply acts more violently on 
the prices of food and raw products than on the prices of 
manufactured goods. J^ot only are they more perishable, 
and not so capable of being held for a better market, but 
the demand neither increases nor decreases in proportion 
to their cheapness and dearness. That this affects the 
equilibrium of the equation to the advantage of manu- 
facturing countries. Mill himself allows in the quotation 
I have made from him at the beginning of this chapter ; * 
and how important this concession is, can not but strike 
any one familiar with his illustration of the adjustment 
of the equation in the supposed trade between England 
and Germany, in cloth and linen. In this illustration he 
shows how the whole benefit may accrue to the nation 
whose demand for the products of the other increases 
least as the effects of cheapness, and certainly the demand 

* Book III, chapter xviii, section 4: "If, therefore, it be asked what 
country draws to itself the greatest share of the advantage of any trade it 
carries on, the answer is, the country for whose productions there is in 
other countries the greatest demand, and a demand the most susceptible of 
increase from additional cheapness,^'' 



THE EQUATION OF INTEENATIONAL DEMAND. 189 

of a manufacturing nation for agricultural produce ful- 
fills this condition. 

But the efficiency of agricultural labor being so large- 
ly determined by the vicissitudes of the seasons, produces 
another effect in addition to this. A high price of man- 
ufactured goods immediately leads to and is accompa- 
nied by a great increase of production, and such high 
23rice is realized on a greater product, but a high price 
of raw products is caused and accompanied by a small 
amount of production, and is only realized on a relatively 
lesser product. This effect, to be sure, is partly compen- 
sated by the high price of raw products being longer 
sustained than the high price of goods, because the supply 
which will eventually lower the price can not so soon 
be obtained. It is not wholly so compensated, because 
the sujDply of goods comes gradually, and, on account of 
the greater employment of labor it calls for, unproductive 
consumption is increased, and any increase of unproduc- 
tive consumption tends to longer sustain prices and prof- 
its. The increase of the supjaly of raw produce and food 
comes suddenly. It is usually affected at once, as soon 
as a new harvest is gathered ; but, unlike a scarcity of 
goods, a scarcity of raw produce and food does not lead 
to any increase in the employment of labor, but rather 
to a decrease, unless, indeed, it is continued through sev- 
eral seasons, and then the effectual demand of laborers is 
greatly lessened, even though more are employed, on 
account of the consequent fall in their real wages. The 
scarcity price is not, therefore, at all sustained by an in- 
crease of unproductive consumption, and as the profits 
of different industries in different nations do not so 
strongly tend to equality as do the profits of different in- 
dustries within a nation, it follows that fluctuations in 



190 CAPITAL AND POPULATION. 

value will tend, on the wliole, to benefit mannfacturing 
rather than agricultural profits and prices. 

The effect upon the equation of international demand 
of the inherent differences between agriculture and man- 
ufactures is, as far as I am aware, a result that has hardly 
been noticed, much less discussed, by economists. Mill 
does barely touch upon the subject in discussing the cost 
of bullion in Book III, chapter xix, section 2, where he 
says : 

" Countries whose exportable produce consists of the finer man- 
ufactures, obtain bullion, as well as all other foreign articles, ceteris 
paribus,, at less expense than countries which export nothing but 
bulky raw produce." 

But neither here nor elsewhere has he given to the sub- 
ject much consideration. 

I am by no means confident that I have enumerated 
all of the causes which affect the equation to the detri- 
ment of an agricultural people ; much, doubtless, that I 
have failed to observe might be elucidated by further 
discussion ; but I have shown that the equilibrium of the 
equation will certainly be reached at a point that will 
yield the largest share of benefit to manufacturing na- 
tions. "What are the limits within which the equation 
must somewhere settle ? Mill asserts that such limits are 
supplied by the increased efiSciency of labor and capital 
due to international trade — Hicardo, to the increased 
efficiency of labor alone. The gain to the world is surely 
no more than the increase in the efficiency of labor. In- 
deed, I utterly fail to comprehend the expression, " in- 
creased efficiency of capital " as relating to the nationality 
of capital. It can not refer to the rate of profit ; that has 
to do with the division of the product, not its amount. 
The same material amount (not value) of fixed capital 



THE EQUATION OF INTERNATIONAL DEMAND. 191 

(and it is fixed capital which mainly concerns ns here) 
will employ the same amount of labor, of equal skill and 
efiiciency, in one country as it will in another. It is in- 
deed true that a country in which the volice of such capi- 
tal is the least can produce manufactured goods at a cor- 
respondingly smaller money cost, but that does not affect 
the totality of the world's products, but only their divis- 
ion. All variations in ^' the efficiency of capital " are 
really variations in the efficiency of labor. Mill is more 
accurate in his statement than Ricardo, but neither of 
them is right. The limits of the fluctuations of the 
equation of international exchange are the prices at 
which the articles under consideration can be produced 
in the exporting and in the importing country. As far 
as such prices depend upon economic causes, such eco- 
nomic causes do not include the " efficiency of capital," 
but are mainly the respective margins of cultivation, and 
in some slight degree the rate of proportional wages ; but 
sometimes, as in the case of England and India, moral 
causes practically remove all limits by preventing the 
accumulation of the capital necessary to the most advan- 
tageous employment of labor. Mill and Eicardo them- 
selves affirm that the limits I have claimed are the true 
ones, and only assert the gain in efficiency to be also the 
limit, because they consider the two to be identical. I 
have already shown the absurd conclusions to which the 
supposition of their identity leads.* 

l!Tow, the equation of international demand can not 
cause imported food and raw products (cost of carriage, 
etc., apart) to sell at a less price than the food and raw 
produce raised at home, unless such food and raw prod- 
uce are of a nature utterly unfitted for the national soil 

* See chapter v, on " Free Trade and Protection." 

9 



192 CAPITAL AND POPULATION. 

and climate, and are not raised at all bj the importing 
nation. The importing nation, nevertheless, obtains an 
advantage by snch importations, which it expends in rais- 
ing its margin or increasing its population, but such ad- 
vantage is not expressed at all by a difference of price as 
affected by the equation we are considering. Trade with 
an agricultural nation will, of course, lower the -price of 
food and raw products, but it will do so to exactly the 
same extent, whether the equation be in favor of or 
against the nation that imports them. How the equation 
stands will show itself entirely in the price which such na- 
tion obtains from the agricultural nations with which she 
trades for the manufactures she exports, and that price 
will vary between that at which she could afford to sell 
the goods immediately after they were produced and the 
price at which the country to which she exports her 
goods could produce them at home, l^ow, if her margin 
has been raised by the trade, she can not afford to sell 
her goods at so low a price as before ; and if her margin 
should be raised to nearly the same point as that of the 
agricultural country, she could afford to sell her goods 
at very little below the cost at which the agricultural 
country could produce them herself. As her margin 
approaches that of the other, the limits narrow within 
which the equation can find an equilibrium, and, when 
the margins became the same, trade would cease between 
the two nations, except in those articles in which one or 
the other of them possessed a natural advantage of soil or 
climate, or an acquired advantage of skill. Each nation 
would produce for herself both the raw produce and the 
manufactured goods, in the production of which she la- 
bored under no real disadvantage. Such a result could 
only occur as a consequent of a comparative depopulation 



THE EQUATION OF INTERNATIONAL DEMAND. 193 

of the manufacturing country. Althougli such depopula- 
tion would result in a diminution of the gross amount of 
its annual produce, the product jper cajpita might or might 
not be increased. During all this process the equilibrium 
of the equation might remain steady, as it is supj)Osable, 
for instance, that the manufacturing country might con- 
tinue all the time to sell its exports at the lowest price at 
which it could produce them, and, though the price of 
such goods would constantly advance, the equilibrium 
of the equation would not be thereby disturbed. The 
equation itself would become more and more beneficial 
to the agricultural country, but it could never attain more 
than its just share of the benefit, and that at the expense 
of the lowering of its margin. 

But how can it be determined that the prices at which 
goods are interchanged between nations are such that 
neither suffers from its demand for the other's goods be- 
ing greater than the demand of the other for its goods ? 
Such a state of affairs exists when each nation pays for 
its imports the price at which the other can afford to sell 
them to it, with the ordinary profit, immediately after, or 
at a corresponding and equal distance of time from, their 
production. If either nation pays the other a greater 
price than this, the equation is against it to exactly that 
extent. 

To make this point plain, let us suppose the equation 
to be against the agricultural country. This would enable 
the manufacturing country to obtain more for her exports 
than the price at which she could afford to sell them. It 
would increase her manufacturing but not her agricult- 
ural rate of profit. This would result in a transfer of 
part of her labor from agriculture to manufactures. If 
this raised her margin, the price at which she could pro- 



194: CAPITAL AND POPULATIOJ^. 

diice mamif actured goods would finally be as great as that 
she obtained for them, and the advantage gained would 
no longer be expressed in the equation, but in her margin 
of cultivation. If, however, her population increased to 
such extent as to allow of no rise, or only a partial rise, in 
her margin, it would appear that her rate of manufactur- 
ing profit would be permanently greater than her rate of 
agricultural profit — a manifest absurdity. The two rates 
can not, of course, vary except for a short time. But the 
price at which commodities sell is not wholly composed 
of wages and the profits of fixed capital and active stock. 
The profit of dead stock is as truly a component of price 
as any of the others. The element of time that will prob- 
ably elapse between the production and the sale of goods 
is always considered by the producer as an element of 
cost. The higher the price at which he can sell his com- 
modity, other things being equal, the longer he will be 
content to wait before selling it. When, therefore, the 
equation of international demand is permanently in favor 
of a manufacturing nation, the rate of manufacturing prof- 
its will, in a short time, be no higher than before, but 
the amount of dead stock which such nation can accumu- 
late without depressing its industry will be greatly in- 
creased. The benefit from the equation being in its favor, 
will express itself, not in the rate but in the aggregate of 
manufacturing profits. 

I regard this result of the equation of international 
demand as a very important principle of the science, and 
for many reasons : 

1. It affords a striking verification of the fact herein 
claimed, that the whole tendency of the equation is to the 
benefit of manufacturing nations, as it can not be disputed 
that they are the ones who actually do possess the largest 



THE EQUATION OF INTEK NATIONAL DEMAND. 195 

proportion of dead stock, and even if the reasons for such 
tendency I have advanced are not valid, it rests with my 
opponents to find reasons that are, as the result certainly 
occurs. 

2. It points to a deduction that must be made from 
the benefit accruing under free trade to the productive 
efficiency of the world — dead stock of itself is of no ad- "- 

jvantage. Any unnecessary increase in its permanent 
amount is just so much subtracted from the sum of en- 
joyed products, and is as much a loss to the world as if it !• 
had been consumed by fire. The loss, indeed, is not Yerj 
great, But it is a real one. But the effect of permanent 
increase of dead stock is to permanently lower real, 
though not proportional wages, and it benefits capitalists 
at the expense of the laborers, a very undesirable result. 

3. It affords an economic explanation of the fact that 
manufacturing are exclusively the lending nations of the 
world. That they are so has hitherto been attributed to I 
moral causes, and the benefit derived has been reararded 1 
as the well-merited reward of superior thrift, abstinence, i 
and industry, whereas it now appears to be a due effect of ' ' 
the lawsj)f international exchange, and a natural and in- '^ 
evitable result of the character of the national occupations 
rather than of the industry and thriftiness with which 
such occupations are pursued. The possession of this 
large amount of dead stock affords at all times to manu- 
facturing communities an available fund for foreign in- ^ 
vestment. It makes England the store-house and com- 
mercial center of the world, and London the capital in 
which nearly all large loans are raised. Whether or no a 
proposed investment, promising a profit, shall be made, 
depends almost wholly on the amount of idle funds be- 
longing to those to whom the investment is proposed. 



190 CAPITAL AND POPULATION. 

The known fact that snch funds exist is sure to afford to 
their possessors the choice of all existing opportunities 
for investment. They are thus enabled not only to select 
the most promising of such opportunities, but are enabled 
to very rapidly convert their dead stock into active capi- 
tal, and thus prevent it from lowering prices and the 
rate of profit. Accumulation can go on in such nations 
more rapidly and for a longer time without depressing 
industrial activity. Any race of men will accumulate 
more in such circumstances than they would or could in 
an agricultural status, where comparatively small accu- 
mulations so depress the rate of profit that the fund from 
which accumulations are made is immediately destroyed.* 

* This brings us to the last of the counter-forces which check the down- 
ward tendency of profit in a country whose capital increases faster than 
that of its neighbors, and whose profits are therefore nearer to the mini- 
mum. This is the perpetual overflow of capital into colonies of foreign 
countries, to seek higher profits than can be obtained at home. I believe 
this to have been for many years one of the principal causes by which the 
decline of profits in England has been arrested. It has a twofold opera- 
tion : In the first place, it does what a fi?e, or an inundation, or a commer- 
cial crisis would have done ; it carries off a part of the increase of capital 
from which the reduction of profits proceeds. Secondly, the capital so car- 
ried off is not lost, but is chiefly employed either in founding colonies, 
which become large exporters of cheap agricultural produce, or in extend- 
ing and perhaps improving the agriculture of older communities. It is to 
the emigration of English capital that we have chiefly to look for keeping 
up a supply of cheap food and cheap materials of clothing, proportional to 
the increase of our population ; thus enabling an increasing capital to find 
employment in the country, without reduction of profit in producing manu- 
factured articles with which to pay for this supply of raw produce. Thus, 
the exportation of capital is an agent of great efficiency in extending the 
field of employment for that which remains ; and it may be said truly that, 
up to a certain point, the more capital we send away, the more we shall pos- 
sess and be able to retain at home. 

In countries which are further advanced in industry and population, and 
have therefore a lower rate of profit than others, there is always, long be- 



THE EQUATION OF IKTEENATIONAL DEMAND. 197 

Not only are manufacturing nations, as a result of the 
character of their industry, afforded opportunities for the 
accumulation of capital far beyond those of their agricult- 
ural neighbors, but they are enabled to usurp for them- 
selves, by means of foreign investment, the few oppor- 
tunities which are afforded to an agricultural people by 
the nature of their occupation. 

They are enabled to do this by the large amount of 
funds, available for such investment, which are actually 
forced into their possession by the tendency of the inter- 
national equation in their favor, which tendency inevita- 
bly increases their dead stock by necessarily increasing 
the gross amount of their manufacturing profits in pro- 
portion to their agricultural profits. As the rate of the 
one can not but for a very short time exceed that of the 
other, the two rates can only be brought together by an 
increase in the amount of capital on which manufacturing 
profits are paid. Under such circumstances any and 
every people would accumulate, and it is absurd to praise 
them for their thrift and abstinence in so doing. 

fore the actual minimum is reached, a practical minimum, viz., when profits 
have fallen so much below what they are elsewhere, that, were they to fall 
lower, all further accumulations would go abroad. In the present state of 
the industry of the world, when there is occasion, in any rich and improv- 
ing country, to take the minimum of profits at all into consideration for 
practical purposes, it is only this practical minimum that needs be consid- 
ered. As long as there are old countries where capital increases very rap- 
idly, and new countries where profit is still high, profits in the old countries 
will not sink to the rate which would put a stop to accumulation. The fall 
is stopped at the point which sends capital abroad. It is only, however, by 
improvements in production, and even in the production of things consumed 
by laborers, that the capital of a country like England is prevented from 
speedily reaching that degree of lowness of profit which would cause all 
further savings to be sent to find employment in the colonies, or in foreign 
countries. 



198 CAPITAL AND POPULATION 

Within tlie nation itself, the effect of this normally 
larger amount of dead stock is to lower real wages with- 
out any disturbance of proportional. So far as the la- 
borers consume manufactured goods, they pay for them 
more than they would if the normal amount of dead 
stock were less. Goods held for a year before they reach 
the consumer will, in the long run and on the average, 
cost him about ten per cent more than they otherwise 
would, and whatever increment of cost is due to this 
cause operates as a transfer of value, without equivalent, 
from the consumers to the capitalists, and in so far as such 
consumers are laborers they suffer a loss of real wages. 

The possession of this normally large amount of dead 
stock is not so much to be considered as itseK a tax 
upon the foreign consumer, as the form in which the tax 
upon him, caused by the equation of international de- 
mand being unfavorable, expresses itself and is gathered 
by the nation that supplies him with manufactured goods ; 
but it does enable such nation to lay a tribute upon him 
in the shape of profits and interest upon loans and invest- 
ments in his country that would else have been made from 
home accumulations of dead stock, only possible to a 
manufacturing country. This commercial tribute is very 
great in amount, and is an addition to the other injuries 
I have enumerated as resulting to an agricultural nation 
from an unrestricted intercourse with manufacturing 
ones.* 

* " Before closing this discussion, it is fitting to point out in what man- 
ner and degree the preceding conclusions are aiiected by the existence of 
international payments not originating in commerce^ and for which no 
equivalent in either money or commodities is expected or received ; such as 
a tribute, or remittances of rent to absentee landlords or of interest to for- 
eign creditors, or a government expenditure abroad such as England incurs 
in the management of some of her colonial dependencies. . . . 



THE EQUATI0;N" of international demand. 199 

1^0 explanation of the fact that manufacturing are the 
lending and agricultural the borrowing nations of the 
world, other than that here given, is possible ; and the 
verification of my claim, that the equation of interna- 
tional demand is persistently unfavorable to agricultural 
nations, is complete. 

Fourthly, it aids in the explanation of the observed 
fact, that, as nations grow in capitalized wealth, there is a 
tendency for the normal rate of interest — the rate under 
which capitalists are content to go on accumulating— to 
be lowered. This tendency is, to a large extent, explica- 
ble in the present state of the science, but the principle 
here enunciated affords an additional reason why the fact 
occurs : when the amount of dead stock is naturally larger 
in one country than in another, fresh accumulations of 
the same amount will form a smaller percentage of the 
total, and will not affect the rate of profit so much as 
when added to the accumulations of a nation w^hose 
normal amount of dead stock is small. The tendency 

" To begin with the case of barter. The supposed annual remittances 
being made in commodities, and being exports for which there is to be no 
return, it is no longer requisite that the imports and exports should pay for 
one another ; on the contrary, there must be an annual excess of exports 
over imports, equal to the value of the remittance. If, before the country 
became li&ble to the annual payment, foreign commerce was in its natural 
state of equilibrium, it will now be necessary, for the purpose of effecting 
the remittance, that foreign countries should be induced to take a greater 
quantity of exports than before ; which can only be . done by offering those 
exports on cheaper terms, or, in other words, by paying dearer for foreign 
commodities. The international values will so adjust themselves that either 
by greater exports, or smaller imports, or both, the requisite excess on the 
side of exports will be brought about ; and this excess will become the per- 
manent state. TJie result is, that a country lohich makes regular payments ( 
to foreign countries, besides losing what it pays, loses also something more by ; 
the less advantageous terms on lohich it is forced to exchange its productions 
for foreign commodities^ — (Mill's "Principles.") 



200 CAPITAL AND POPULATION. 

to accumulate is thereby strengthened, as the risk of its 
proving entirely useless is lessened, and the same amount 
of accumulations has less effect in lowering the rate of 
profit. 

The existence of a normally large dead stock is an ele- 
ment of security, and as such affects the desire to accumu- 
late. Capitalists are always better content to invest in 
securities affording a uniform return than in those afford- 
ing a variable one, the same, or even somewhat greater, 
in average amount. They will, therefore, be willing to 
add more to a normally large dead stock than to a nor- 
mally small one, even if thereby the rate of profit is 
somewhat lessened. It is also to be noticed that, if the 
equation of international demand remains as favorable as 
before to the manufacturing nation, a lowering of the 
rate of profit will not reduce the price at which it sells its 
manufactured goods. Such price depends upon the equa- 
tion and not upon the rate of profit ; but such lowering of 
the rate of profit, as it can not lessen the aggregate of 
manufacturing profits, will cause a further increase in the 
normal amount of dead stock which the manufacturing 
nation will hold and possess. 

I desire to call attention to the explanation, afforded 
by the principles and tendencies here enunciated, of an 
otherwise inexplicable historical fact. I refer to the recent 
and apparently permanent lowering of the rate of interest 
and profits in the United States. Free-traders are accus- 
tomed to assert that our undeniable prosperity under pro- 
tection is owing to our great natural resources, and is in 
spite of our fiscal policy and not due to it. They forget 
that the gain in the efficiency of labor due to free trade 
is in exact proportion to the agricultural advantages which 
a nation possesses. The more fertile a nation is^ there- 



THE EQUATION OF INTERNATIONAL DEMAND. 201 

fore, the greater should be her loss in adopting a pro- 
tective policy, if they are right as to the effects of free 
trade and protection upon the distribution of wealth. 
Protection to manufactures . should be more disastrous to 
us than to nations whose manufacturing industries less 
need protection. Their explanation is evidently faulty, 
because our advantage in natural resources can not over- 
balance our mistaken policy, if the results of that policy 
are disastrous in proportion to our natural advantages. 
The fact remains that we have prospered and are pros- 
pering, and have succeeded in accumulating vast resources 
in fixed capital and in active and dead stock, and that the 
latter species of wealth has increased in greater propor- 
tion than the other two. It is this latter fact that explains 
the permanent lowering of our normal rates of profit and 
interest. The equation of international demand is no 
longer against us. Our capital is replacing foreign cap- 
ital, as is shown by the comparative decrease in our for- 
eign obligations. We yet owe too much abroad, and 
have as yet only begun to avail ourselves of foreign in- 
vestment as an avenue for the escape of superabundant 
means. But we are rapidly paying our debts, and are 
commencing to invest in other countries, notably in Mex- 
ico. By supplying ourselves with manufactured goods 
we have lessened our demand for foreign goods, and are 
obtaining those we yet require at cheaper rates and are 
enjoying a vast increase of capitalized wealth and a very 
great industrial activity. The efficiency of our labor is 
undoubtedly somewhat lessened, but that the loss result- 
ing from this has been more than made up to us by the 
increased aggregate of our profits, by the increase in our 
productive efficiency through the fuller employment of 
our labor, and by the adjustment of the equation in our 



202 CAPITAL AND POPULATION. 

favor, can not be denied as an actually existing fact, and a 
fact inexplicable on any other theories than those here 
insisted upon. That much, if not all, of our prosperity 
has been obtained at the expense of European nations, 
England especially, is also self-evident. The develop- 
ment of our railroads and water-ways and the discovery 
of our ability to export live-stock and fresh meat have 
cheapened agricultural produce to such extent that Eng- 
land can no longer cultivate her poorest lands and pay 
tbe same real wages as before. She is, therefore, obliged 
to throw land out of cultivation, at the very time that she 
must lower her margin of cultivation, if she would retain 
her manufacturing supremacy, although the real wages of 
her laboring classes are already so low that they can not 
well be further reduced. 

A party is arising in England antagonistic to free 
trade. They demand '' fair trade," by which they mean 
protective duties on imports from those nations who dis- 
criminate in their tariffs against the productions of Eng- 
land. How futile, nay disastrous, such a policy will be, 
can not fail to be appreciated by any one who has fol- 
lowed the argument of this treatise. A nation with a 
low margin of cultivation can not protect itself against 
one with a high margin. It is absolutely helpless in the 
matter of reprisals. Any attempt in that direction only 
magnifies the injury. The sole advantage that a pro- 
tective policy can afford is due to its diverting labor 
from agriculture to manufactures. Protective duties in 
England, leveled against an agricultural nation with 
which she trades, can only result in the opposite direc- 
tion, viz., the diversion of her industry from manufact- 
ures to agriculture. This will render her vast capital 
too great for her needs. It will depress the rate of profit, 



THE EQUATION OF INTERNATIONAL DEMAND. 203 

and lead to a corresponding cessation of industry. It 
will divert her labor and capital to the employments that 
will yield the least aggregate returns in wages and profits. 
England's interests are advanced by free trade. Its gen- 
eral adoption would enable her to appropriate to herself 
great advantages at the expense of the nations with 
which she trades, but there will some advantage remain 
to her by adhering to that policy even when all the agri- 
cultural nations, from whom she imports food and raw 
produce, have excluded her own products. It is this 
fact that has misled the English school of economists. 
Their own national affairs are subserved by free trade 
alone, and afford an apparently complete verification and 
justification of the doctrine, when the interests of other 
nations are unconsidered. It was very natural that Mill 
and Kicardo should have given undue prominence to 
the facts under their own eyes, and should have neg- 
lected facts never presented in English experience ; and 
as natural that American economists and statesmen 
should have so largely refused to accept their conclusions, 
despite their not being able to detect the logical flaw in 
their arguments. The consideration of the tendency in 
civilized nations for capital to be accumulated faster than 
it can be utilized, even by a growing population, supplies 
the logical premise needed, and explains as they never 
have been explained the economic facts actually existent. 



CHAPTER XII. 

DISTRIBUTION OF WEALTH IN A PROTECTED NATION. 

Having now established on economic principles tliat 
the policy of protection may augment the gross revenue 
of an agricultural nation, the consideration naturally 
arises as to what effect it will have upon the distribution 
of such gross revenue between the two great classes of 
laborers and capitalists. Philanthropic statesmen might 
well hesitate to adopt a policy which made a nation 
richer, partly at the expense of its working population. 
Disparity of individual fortunes is the great curse of 
modern society, and any advantage gained entirely at the 
expense of increasing that disparity might well be fore- 
gone. There are even some moral and social disadvan- 
tages in such increase when it is not obtained at the 
expense of those who have little, but solely from an aug- 
mentation of the gross revenue of society. I at once 
acknowledge that the policy of protection is open to this 
latter objection ; but it is not, I think, to the former, al- 
though that can not be so accurately determined. The 
bulk of the benefit certainly goes to the increase of prof- 
its, but some of it, I think, accrues to the wages-fund. I 
will here consider the reasons for this conclusion. 

It will be well first to notice a temporary benefit that 
laborers receive immediately upon the adoption of the 



WEALTH DISTRIBUTION m A PROTECTED NATION. 205 

policy. The increase of capital necessitated by the di- 
version of agricultural labor to manufactures raises the 
rate of profit and lowers proportional wages, and real 
wages also in so far as the laborer is a consumer of the 
protected article. This effect upon real wages is, how- 
ever, more than made up to the laborers as a class by the 
increased employment that results from such a state of 
affairs, and this increase of employment lasts until the 
needed capital is accumulated, when proportional wages 
advance to the same point as before and real w^ages also, 
except as the laborer is a consumer of the protected arti- 
cle, and the amount of employment is the same, other 
things being equal, as it was originally. How much ad- 
vantage this temporary increase of the wages-fund will 
be to the laborer will depend upon the rapidity with 
which the needed accumulations are made by the capital- 
ists. If all the increased product is converted into capi- 
tal, the increase of the wages-fund will be exactly equal 
to the amount of such capital ; if only half, the benefit 
to the laboring class will be twice that amount ; and if 
only one tenth, ten times, siibject of course to their loss 
as consumers of the protected article. As a matter of 
factjit^may perhaps be estimated that they gain about 
'Slvg times the amount accumulated. This gain is, how- 
ever, temporary, and of no permanent advantage to the 
laborer, unless it leads him to advance his standard of 
living, and it can hardly do this to any appreciable de- 
gree. He suffers, eventually, a permanent loss as a con- 
sumer of the protected article. 

Several benefits obtained by him are, however, to be 
offset against this loss. And it is hardly possible but that 
he derives some net benefit from the policy when it 
really leads to any considerable increase in the national 



206 CAPITAL AND POPULATION. 

production. Whether lie retains the benefit will, of 
course, depend, as do all other benefits conferred upon 
him, npon his using it as an enhancement of individual 
comfort, or as affording him an opportunity of marrying 
earlier and having a more numerous family. 

The diversion of labor from agriculture to manufact- 
ures raises in some degree the margin of cultivation, and 
this can not take place without a rise in real wages. 
On account of the abundance of our fertile land, this has 
little influence upon the American margin at the present 
time, but we are rapidly nearing the point when it will 
have a very important effect, as most of our best lands 
are now under some sort of cultivation, and, the moment 
we commence to take up land at all inferior to our best, 
we will also feel the beneficial effect of the diversion 
of our labor from tilling the soil. 

Again, whatever increase in their wages skilled arti- 
sans receive is an addition to the wages-fund of a very 
real and important kind, although the benefit goes only 
to a few of the class, and does not improve the condition 
of the lowest class of laborers. 

The benefit resulting from the increased employment 
of females and youths is, how^ever, a substantial addition 
to the incomes of all classes of laborers, and one very con- 
siderable in its amount ; and one also that assists the 
class in restraining the instinct that leads to a too rapid 
increase of population. 

There is also probably some benefit derived from the 
greater diversity in the industries carried on by a pro- 
tected people. Not only do laborers more easily find the 
employment for which they are intellectually and phys- 
ically best fitted, and in which, therefore, labor is less 
onerous to them and more efficient in production, but the 



WEALTH DISTEIBUTION m A PPwOTECTED NATION. 207 

amount of employment is more uniform, as the greater 
the variety of a nation's pursuits, the less liable are they 
to be all depressed at the same time, and such variety is 
in itself an education to the laborer, which spurs him to 
strive for something better than his present lot. 

The possessors of great wealth can not keep its enjoy- 
ment wholly to themselves. The beauty of their resi- 
dences and grounds gives 23leasure to the eye of the 
passer-by as w^ell as to the owners, and the refinements 
of life with which they surround themselves civilize and 
refine their menials as well as themselves, though not, of 
course, to the same degree. Life in a rich community is 
far more attractive, and a better thing to the laborers, 
than life in a poor and unkempt land, even if they pos- 
sess no greater material comforts. 

There is also a substantial advantage to the laboring 
class in living in a community better able to protect itself 
against its neighbors ; and, as Ricardo so conclusively 
shows, the strength of a nation in war depends not upon 
its gross but upon its net revenue. 

It can not be doubted but that the sum of these ad- 
vantages more than repays to the laborer the enhanced 
price of the manufactured commodities he consumes, and 
even that he can at any time recover by restraining popu- 
lation. To some, though probably a slight degree, he is 
benefited by protection. If he is not, the moral right 
of the nation to take fifty cents from his pocket to give a 
dollar to the capitalist may well be questioned, although, 
even if that were the result, much might be advanced in 
defense of such action. But it is not the result, and, 
although capitalists reap nearly all the benefit of protec- 
tion, some benefit undoubtedly is obtained by the work- 
ing classes. 



208 CAPITAL AND POPULATION. 

The claim, so blatantly made about election-time, that 
the purpose of protection is to protect American laborers 
against the competition of " pauper labor," is, of course, 
absurd, and can not be too strongly reprobated. To make 
the laborers understand their true economic position is 
the first duty of every student and teacher of political 
and social economy, as it is only when they appreciate 
the true conditions and limitations of their position that 
the effort to raise the class by co-operation and the re- 
straint of their instinct to over-populate can be at all 
effectual. To confuse their minds by false economic 
ideas is to do them the greatest possible injury. 

The gross income of the class of capitalists can not 
but be increased as the result of a protective policy, even 
in the rare cases when it entails a positive loss to the 
laborers. Even then some national advantages result. 
The refining influences of a wealthy class extend far be- 
yond its own borders, and, as we have seen, the existence 
of such a class in relatively large proportions adds greatly 
to the offensive and defensive power of a nation — both 
most desirable results. 

The existence of such a class in larger proportion than 
would occur under free trade will cause a further aug- 
mentation of national wealth that I have not yet noticed. 
Every increase of capital, needed in industry, being 
created by the very demand, or rather by the otherwise 
idle labor, which such demand utilizes, it follows that 
every diversion of capital to uses which do not affect the 
rate of profit is an addition to the possible wealth of a 
people. Such species of wealth is that reserved for pro- 
longed unproductive consumption. 

The elegant residences, the public parks and build- 
ings, the museums, the art-galleries, the places of amuse- 



WEALTH DISTRIBUTION IN A PROTECTED NATION. 209 

ment, the sea-side resorts, all these, whatever their expense 
to individuals, cost the nation nothing but labor that would 
otherwise be wasted. Such wealth affords no material 
profit to the community, though it is more or less made 
to yield a profit to individuals, but this merely affects the 
distribution of wealth, not its creation ; none the less does 
it yield a revenue, for it gratifies, without its own diminu- 
tion, the very wants and desires the ultimate satisfaction 
of which by material products alone gives value to mate- 
rial products themselves. It is the noblest and best 
wealth a nation can possess, while its cost to it is the 
least. 

But the amount of such wealth will always be regu- 
lated more or less closely by the amount of capital which 
a nation is able to employ productively. Any policy, 
therefore, that increases such amount, even if it results 
in no increase of the annual material product, will in- 
crease the amount of this species of wealth and the 
gratifications it annually and for all time yields. ]!^ot 
only will it be increased in proportion to the increase 
of capitalized wealth, but in a greater proportion, as, the 
larger the incomes of the rich are, the relatively more of 
them will they devote to these purposes and to the more 
refined and gesthetic enjoyments which they afford. 'No 
nation can hope to advance beyond its fellows in culture, 
refinement, and art, and in intellectual and aesthetic at- 
tainments, that does not possess a very large proportion 
of such wealth, and no agricultural nation ever has or 
ever can possess such wealth in any considerable degree 
so long as it confines its energies and restricts its capital 
to the tilling of the soil. 



CHAPTER XIII. 

RENT. 

BiCAEDO says in his chapter on ^' Kent," page 40 : 

" The rise of rent is always the effect of the increasing wealth 
of the country, and of the difficulty of providing food for its aug- 
mented population. It is a symptom but it is never a cause of 
wealth ; for wealth often increases most rapidly while rent is either 
stationary or even falling. Kent increases most rapidly as the dis- 
posable land decreases in its productive powers. "Wealth increases 
most rapidly in those countries where the disposable land is most 
fertile, where importation is least restricted, and where, through 
agricultural improvements, productions can be multiplied without 
any increase in the proportional quantity of labor, and where con- 
sequently the progress of rent is slow." 

Though in the main I agree with Hicardo in this 
passage, except, of course, where he affirms that wealth 
increases most rapidly where importation is least re- 
stricted, the meaning would be clearer to me if Ricardo 
had more accurately defined what he means by wealth. 
Except as increase of wealth (however defined) increases 
the demand for native food, it has no effect upon rent, 
and rent may decline, even when population is increasing, 
if the nation imports an additional proportion of its food- 
supply. 

Wealth may be intended to mean, and in the quoted 
passage I take it as meaning, the aggregate wealth of the 
community, or we may mean, by a wealthy country, one 
whose wealth is great jper caj^ita of its population. Or 



RENT. 211 

we may not, in using the term, refer to accumulations at 
all, but to either the gross amount of the annual prod- 
uct or the average amount per capita. These four mean- 
ings are very different, and the relations of wealth to 
rent vary greatly according to which of the four mean- 
ings we attach to the word. The proper aim of political 
and social endeavor is to attain wealth in the last meaning 
I have noted. In that sense an increase of wealth is 
rather coincident with a fall than with a rise in rentals. 

A rise in rent is the cause of an increase of accumu- 
lations, because it enables a nation to divert more of its 
labor to those industries which can utilize accumulations. 
A rise in rent may therefore be a cause as well as a symp- 
tom of wealth. 

It is customary to regard rent as a transfer of wealth 
from the consumer of food to the landlord, and this is 
true of rent so far as it is due to the natural or acquired 
fertility l)f~the"soil. But it has not been observed— at 
least T do not remember that it has been observed — that 
the rent due to propinquity to market is an exception to 
this, in so far as the consumers of food at an enhanced 
price are artisans. When this is the case, rent due to 
propinquity is paid by the consumer of manufactured 
goods. Food is always somewhat higher in towns and 
cities than in the country, and, as a consequence of this, 
lands near towns and cities bring a rental additional to 
that due to their inherent or acquired fertility exactly, 
in the long run, equal to such enhanced price due to the 
saving in cost of carriage. When, therefore, proportional 
and real wages of artisans and agricultural laborers are 
the same, the money-wages of the artisans will be higher, 
and this addition to their money-wages will enhance the 
price of the goods they manufacture, and will finally be 



212 CAPITAL AND POPULATION. 

paid bj the consumer of those goods. It follows, there- 
fore, that the consnmer of any imported manufactured 
article pays some rent to a foreign landlord, and that a 
country that protects its manufactures escapes thereby 
the payment of rent to foreigners. 

If the industries that spring up in consequence of pro- 
tection are concentrated in special localities to the same 
degree as in the other country, the consumers of goods 
do not save this rental. If they concentrate in greater 
degree, they may even pay more than they did before : 
and, if in lesser degree, less ; but, whatever the amount, 
they pay it to their own countrymen. 

The sum total of rentals due to propinquity is consid- 
erable, and it is certainly better for a nation to pay it to 
its own than to foreign landlords ; and this effect of pro- 
tection, as far as it goes, is a valid argument in its favor. 
The idea here expressed seems to be at the bottom of the 
popular idea that a home is preferable to a foreign mar- 
ket. That it is so has been instinctively felt, rather than 
logically appreciated, but a consideration of the fact that 
rent due to propinquity is an element of the cost of 
goods shows that the popular idea is right, however illog- 
ically held and expressed. 

The beneficial influence of protection upon the rentals 
due to fertility will not, of course, be denied by the most 
enthusiastic free-traders. A diversion of industry in a 
protected country from agriculture to manufactures can 
not but occur, and this forces upon countries with which 
it trades a corresponding and inverse diversion. Its 
margin of cultivation is raised, its purely agricultural 
rents lowered, and rentals due to propinquity increased. 
This in some degree raises the average remuneration of 
its labor and lowers its rentals, thus benefiting its laborers 



EEiTT. 213 

at the expense of its landlords. Such benefit, whatever 
its amount, is in the more even distribution as well as the 
creation of wealth, bettering the consumer at the land- 
lord's expense, whereas the benefit derived from rentals 
due to propinquity is an addition to national w^ealth at the 
expense of the rentals of the landlords of other nations. 

Where the benefits of the concentration of manufact- 
ures are an offset or more than an offset to the increase 
of rentals due to propinquity it may perhaps be technic- 
ally incorrect to consider such rentals as part of the cost 
of production of manufactured goods. That, however, 
does not affect my argument, as in any case they are a 
source of income, under free trade, to foreigners, which 
protection enables us to appropriate to ourselves as con- 
sumers or landlords. 

The rentals yielded by water privileges, while not 
strictly an element in the cost of production, are likewise 
an additional income obtained by protection, which for- 
merly pertained to those who supplied us with the pro- 
tected goods. 

While it is immaterial that the above sources of in- 
come should be technically considered as an element of 
cost of production, I must contend that they should be so 
regarded. They do not, indeed, affect the price at which 
different manufacturers can afford to produce, any more 
than a difference in the rental paid by them affects the 
relative price at which two different farmers can afford 
to sell the products of their farms ; but as a rise in agri- 
cultural rents varies the proportion in which raw produce 
and goods will exchange, so also does a rise in manufact- 
uring rentals increase the exchangeable value of goods as 
compared with raw produce, and is in every sense an ele- 
ment of their money cost and exchangeable value. 



CHAPTEE XIY. 

COMMERCE. 

Foe tlie sake of simplicity, I have heretofore confined 
the discussion to manufacturing and agricultural commu- 
nities. A few words in reference to the relations of 
both these to commercial nations is fitting in this place. 

The four great divisions of human industry are agri- 
culture, manufacturing, exchanging, and rendering serv- 
ices. The latter does not here demand our considera- 
tion, and we have already discussed the first two. Com- 
merce, including by the term exchanges from place to 
place as well as from producer to consumer, is the third. 
There is, indeed, no inherent connection between ex- 
changes from place to place and from producer to con- 
sumer, but, as a matter of fact, the tendency is more or 
less strong for the same class of individuals to engage in 
both employments, though not so strong as for the nations 
which most largely engage in the carrying-trade to also 
engage in effecting the exchanges of the goods they carry 
between different peoples. This tendency in commercial 
nations is greater if they are also manufacturing commu- 
nities, as they then possess an additional amount of capi- 
tal seeking investment, much of which will certainly find 
its way to employment in effecting international inter- 
change. 



COMMERCE. 215 

In its torn J a large amount of carrjing-trade done hj 
a nation reacts to the benefit of its manufacturing indus- 
tries, as it affords cheaper and quicker transit to its ex- 
ports and imports. A large merchant marine and, still 
more, regular steamship-lines to foreign ports, enable 
a manufacturing community to monopolize markets in 
which she has no other advantage, or would even be at 
a disadvantage, if it were not for her better means of 
communication. 

Commerce, as a national industry, possesses advan- 
tages~over IBoth agriculture and manufacture. Far back 
~as^we may go in the history of the world, we invariably 
find that the nations whose wealth, in proportion to their 
population, was the greatest were distinctively commer- 
cial peoples. Tyre, Sidon, Carthage, Yenice, Holland, 
and finally England, are practical illustrations of the fact 
asserted. The illustrations given are somewhat com- 
plicated by the fact that, owing to the mutual stimulus 
which the two forms of industry exert, the carrying na- 
tions have, to a large extent, been manufacturing ones 
also ; but still the fact is evident that those communities 
have been the most prosperous who directed the greatest 
proportion of their industry to commerce. 

The main reason of this (those noticed above are only 

secondary) can be gathered at once from the principles 

i we have been elucidating. Transferring and exchanging 

l^ 1 commodities utilize more capital in proportion to the 

f/' \labor employed than either branch of production proper. 

The gross accumulations and the gross return in wages 

and profits together are larger in it than in any other 

forms of industry. It possesses, therefore, even greater 

recommendations as a national employment than manu- . 

f acturins*. 

^ 10 



216 CAPITAL AND POPULATION. 

What are the causes whichj under free trade, deter- 
mine whether or not a nation shall engage in this form of 
industry ? Everything, of course, which lowers or raises 
the price at which she can afford to transport goods from 
one place to another, or transfer them from the producer 
to the consumer. 

The money cost of transporting goods by any nation 
will depend mainly upon the lowness of her margin of 
cultivation ; the lower this is, the lower will be the real 
and money wages of her navigators, and, what is of vastly 
} more importance, the lower will be the money cost of her 
I vessels as far as manufactures enter into such cost. The 
\ money cost of raw products will be slightly greater, and 
that of mineral products will depend upon the fertility 
of her mines and the lowness of her margin as affecting 
money- wages. As the cost of putting together is about 
ninety per cent of the total cost of a vessel, the same 
merchant marine will be much cheaper in money to 
nations with low margins — although it will cost them a 
slightly greater expenditure of labor on account of raw 
produce forming a small ingredient of the total cost. 
But, while a commercial country will be favored by a low 
rate of real wages, she will be benefited by a high rate 
of proportional wages, as they will not increase the 
money value of her marine, while they will considerably 
lessen the amount of the return her capitalists expect, or, 
in other words, they will be willing to carry for a rate 
yielding a smaller profit than they would if proportional 
wages were lower. 

But investment in the carrying-trade differs from that 
in manufactures, not only in the proportion of its amount 
to the labor employed, and in the proportion which fixed 
capital bears to circulating, but also in the proportion in 



COMMERCE. 217 

which circulating capital will be divided between dead 
and active stock. The owners of marine investment, 
unlike manufacturers, can get no profit at all from dead 
stock in their own business. Profit comes to them in 
the form of money, and must be invested in fixed capital 
(new vessels), or outside their business in some other em- 
ployment, except, indeed, to the extent in which they 
give credit for freights due, and this can never be consid- 
erable. Their active stock is also relatively small, as they 
employ but few laborers in proportion to the amount of 
their business. 

The other part of commerce, into which they in- 
evitably drift, because in no other way can they so easily 
get a profit from any dead stock they accumulate— viz., 
the purchase of foreign produce to hold for, and finally 
to sell to, the home or foreign consumer — employs, on 
the other hand, hardly any fixed capital or active stock. 
Capital so used consists almost wholly of dead stock, but 
of dead stock that yields a profit. 

This hasty explanation of the nature of commerce, ^ 
inadequate as it is, will suffice for our present purpose, ;• -- 
which is to determine the relative advantage or disadvan- 
tage of an agricultural nation doing her own carrying, or 
allowing it to be done for her, as it inevitably must be, 
if economic laws are allowed full sway. The reader can ', 
not fail to see that this advantage or disadvantage can not ' 
be ascertained from a comparison of the money cost of i 
doing it herself with what other nations will charge for ) 
the service. The comparison must be between what 
other nations charge and the money cost of the agricult- 
ural labor which she must divert to the carrying-trade 
to do it herself ; and that part of the cost, composed of 
profits, must not be at all considered, as the capital to 



218 CAPITAL AND POPULATIOK 

wliich sucli profits will accrue will be an addition to the 
wealth of the country that will cost nothing except labor 
that would otherwise be wasted in idleness. It can not 
be doubted for a moment that even those nations who 
enjoy the highest margin of cultivation will derive some 
positive benefit from monopolizing all they can of the 
carrying-trade of the world, and that any loss in the 
efiiciency of labor they suffer, by diverting it from agri- j 
culture to commerce, is several times made up to them' 
in the form of profits. 

But how can a nation protect its commerce ? It can 
absolutely prohibit foreigners from engaging in its own 
coasting-trade^and all or nearly all nations avail them- 
y "\i selves of this opportunity, the free-traders as well as the 
./.U-y^l^eg-t, antagonistic as it is to" Iheir~principles ; but it can 
'^'^^'^^^ not prohibit foreign vessels from bringing cargoes to or 
taking them from its shores, neither can it impose a duty 
or tonnage upon them for so doing. Ketaliation here is 
possible, as it is not to a manufacturing nation, against 
whose products an agricultural nation discriminates. If 
any nation should attempt this, other nations would pro- 
hibit or tax her vessels, and a cessation of all trade would 
result. An agricultural nation finds she can not induce 
her people to engage in commerce unless they build their 
j own vessels ; but they can not do this profitably unless 
she protects ship-building, and this places her ship-owners 
at a further disadvantage in their competition with others. 
In protecting manufactures she controls her own markets, 
and that is sufficient to allow for a gainful diversion of 
industry. In commerce also she controls part of her own 
market, the coasting-trade ; but the advantages of engag- 
ing in commerce are so great that the market she com- 
mands is wholly insufficient for gaining all the advantage] 



COMMERCE. 219 

possibly derived from commerce : she must, therefore, - >" 

subsidize — it is her only resource. '" 'i^' 

"HDuriously enough, the American people have stead- 
fastly refused to adopt this course — mainly, indeed, for 
moral reasons, because the 'corruption and legislative 
bribery pretty sure to result from such a policy are rightly 
odious to them. But they subsidize railroads with public 
lands, and call upon consumers to pay over vast sums to 
manufacturers, and with manifest benefit to themselves ^" '^^^ 
as a people ; while they actually force American ships to 
carry their mails at a positive loss, and refuse subsidies .-^^^ 
to them in any way or shape, although no conceivable 
' investment of the public money would so augment the 
total production of the country. Protectionists in prin- 
ciple, we refuse protection to the very industry in which 
it might yield to us the greatest benefits at the least cost. 
'No wonder our commerce has dwindled away to the van- 
ishing-point, now that we have lost, by the substitution 
of iron for wood in their construction, our natural advan- 
tage in building ships. The loss of our commerce is a f 
very serious drag upon our national prosperity, in every | 
other respect so wisely fostered by our fiscal policy. 

England, with the instinctive keenness in regard to her 
own advantage which she always shows, despite her theo- 
ries, has pursued a different course, and has heavily subsi- an ^ 
dized her steamship lines, and none of her free-traders 
Tift an objecting voice to the policy. And yet, if protec- 
tion is an economic mistake as applied to manufactures, it 
is equally wrong as applied to commerce. No reason can 
be given that justifies the one that will not also justify the 
other, though not, to be sure, to the same degree. Why 
should the British nation so strenuously endeavor to mo- 
nopolize this branch of industry, if there are no inherent 



220 CAPITAL AND POPULATION. 

advantages in one kind of industry over another not ex- 
pressed by the money cost at which they can be carried 
on by native or by foreign labor and capital ? And if it 
be once admitted that there are such inherent differences, 
what becomes of the theory of free trade as applied to 
the distribution of wealth among nations ? 

In Book III, chapter xxv, section 5, Mill says : 

" It is worth while also to notice another class of small but in 
this case mostly independent communities, which have supported 
and enriched themselves almost without any productions of their 
own (except ships and marine equipments), by a mere carrying-trade, 
and commerce of entrepot ; by buying the produce of one country 
to sell it at a profit in another. Such were Venice and the Hanse 
towns. The case of these communities is very simple : they made 
themselves and their capital the instruments, not of production, but 
of accomplishing exchanges between the productions of other coun- 
tries. These exchanges are attended with an advantage to those 
countries— an increase of the aggregate returns to industry — part of 
which went to indemnify the agents for the necessary expense of 
transport, and another part to remunerate the use of their capital 
and mercantile skill. The countries themselves had not capital dis- 
posable for the operation. When the Venetians became the agents 
of the general commerce of Southern Europe, they had scarcely any 
competitors ; the thing would not have been done at all without 
them, and there was really no limit to their profits except the limit 
to what the ignorant feudal nobility could and would give for the 
unknown luxuries then first presented to their sight. At a later 
period competition arose, and the profit of this operation, like that 
of others, became amenable to natural laws. The carrying-trade 
was talen vp ly Holland^ a country with productions of its own and 
a large accumulated capital. The other nations of Europe also had 
now capital to spare^ and were capalle of conducting their foreign 
trade for themselves ; lut Holland^ having from a variety of circum- 
stances a lower rate of profit at home, could afford to carry for other 
countries at a smaller advance on the original cost of the good^ than 
would have leen required ly their own capitalists ; and Holland, 
therefore, engrossed the greatest part of the carrying-trade of all 



COMMERCE. 221 

tJiose countries which did not 'kee'p it to themsehes lyy navigation laws 
constructed^ li'ke those of England^ for that express purposed 

Can one help the deductionj in tliis short epitome of 
the transfer of commercial supremacy from nation to na- 
tion, that weahh followed commerce as well as commerce 
wealth, and that England owes her present commercial 
position very largely to the protective policy of her navi- 
gation laws and to her subsidies ? 

The moral and intellectual advantages to a nation of 
engaging in commerce are almost if not quite as great as 
the material, and might well be purchased at a consider- 
able sacrifice of the latter ; this, however, is somewhat 
apart from the strict scientific aspect of the question, and 
I will merely quote in this connection the following elo- 
quent passage from the " Principles," Book III, chapter 
xvii, section 5 : 

" But tlie economical advantages of commerce are surpassed in 
importance by those of its effects, which are intellectual and moral. 
It is hardly possible to overrate the value, in the present low state 
of human improvement, of placing human beings in contact with 
persons dissimilar to themselves, and with modes of thought and 
action unlike those with which they are familiar. Commerce is now 
what war once was, the principal source of this contact. Commer- 
cial adventurers from more advanced countries have generally been 
the first civilizers of barbarians. And commerce is the purpose of ] 
the far greater part of the communication which takes place between 
civilized nations. Such communication has always been, and is pe- \ 
culiarly in the present age, one of the primary sources of progress. | 
To human beings who, as hitherto educated, can scarcely cultivate 
even a good quahty without running it into a fault, it is indispensa- 
ble to be perpetually comparing their own notions and customs with 
the experience and example of persons in dififerent circumstances 
from themselves; and there is no nation which does not need to 
borrow from others, not merely particular arts or practices, but es- 
sential points of character in which its own type is inferior. Fi- 



222 CAPITAL Al^D POPULATION 

Dally, commerce first taught nations to see Vv'itli good-will the 
wealth and prosperity of one another. Before, the patriot, unless 
sufficiently advanced in culture to feel the world his country, wished 
all countries weak, poor, and ill-governed but his own ; he now sees 
in their wealth and progress a direct source of wealth and progress 
to his own country. It is commerce which is rapidly rendering 
war obsolete, by strengthening and multiplying the personal inter- 
ests which are in natural opposition to it. And it may be said with- 
out exaggeration that the great extent and rapid increase of inter- 
national trade, in being the principal guarantee of the peace of the 
world, is the great permanent security for the uninterrupted progress 
of the ideas, the institutions, and the character of the human race." 

It is a well-recognized ;^>rinciple that the good policy 
of any proposed internal improvement does not wholly 
depend upon its proving a paying investment. We sub- 
sidize our railroads, and are proposing to do away with 
tolls on the Erie Canal; and who can doubt that the lat- 
ter improvement would have added to the wealth of the 
nation, even if it had not, as it has, paid its way ? Inter- 
nal commerce has always enjoyed the fostering care of 
the nation, and no one ventures to doubt the policy, how- 
ever he may sometimes object to special applications of 
it. But why should we divert our labor and capital from 
more efficient to less efficient occupations ? For two 
reasons: First, because great public works are mainly, 
perhaps eventually wholly, an addition to the possible 
wealth of the nation — they are equivalent to a destruc- 
tion of some of its capital, which destruction is very soon 
made whole by the natural action of human industry and 
thrift, while the public works remain, and what utilities 
and enjoyments they do subserve are just so much ad- 
ditional to the real income of the people ; and, secondly, 
because we perceive that the economic effect of no trade 
or occupation is confined to itself alone, but ramifies 



COMMERCE. 223 

through all the arts and employments of the people. But 
arBinalt portion of the profits we derive from our railroads 
accrues to their stockholders, or even to their directors. 
The larger portion of benefit is realized by the travelers, 
farmers, and merchants, who utilize the facilities they 
afford. It is safe to say that there is not a bankrupt road 
in our country that has not been a source of wealth to 
many times the amount of its own cost. Here we have 
indicated another advantage of a protective policy. The 
Tnferplay of benefit between the various occupations and 
employments of men can not but be greater when their oc- 
cupations and employments are most diversified. It is of 
no advantage to a nation of farmers that additional land 
should be reclaimed, but it is of advantage that machine- 
shops should be built in their midst, independent of the 
fact whether such shops can supply them with machinery 
cheaper than they procured it before ; but nothing so 
reacts upon other trades and employments as the estab- 
lishment of means of communication. This commerce 
effects, and thus confers, indirectly through agriculture 
and manufactures, even greater benefits than it does di- 
rectly through its own legitimate profits. 



CHAPTEE XV. 

ULTIMATE EFFECTS OF FREE TEADE AND PROTECTION. 

I HAVE frankly admitted that free trade increases the 
total efficiency of the labor of the world, and have only 
differed from its advocates when they assert that all na- 
tions who adopt the policy will derive some portion of 
the benefit resulting from it. Based on this admission, 
the objection will be formulated that the views here ad- 
vanced are immoral, and that no nation has the right to 
destroy a greater gain to the world to secure a lesser gain 
to itself. It is to be feared that international morality 
has not yet reached the stage in which nations will deny 
themselves a selfish advantage to secure the ultimate good 
of the race, l^one the less, however, is it their duty so 
to do, and the adoption of a protective policy by an agri- 
cultural nation is decidedly immoral, if it ultimately low- 
ers the economic and social status of other nations more 
than it benefits its own. That it does this at the time, 
can not be denied, but whether it does so ultimately is 
another question, on the resolution of which the morality 
or immorality of a protective policy depends. 

The ultimate and most desirable economic condition 
of the globe is that population should be distributed 
among the different countries in exact proportion to their 
extent and fertility. The margin of cultivation would 
then be everywhere the same, and the nature of the in- 



EFFECTS OF FREE TRADE A]S"D PROTECTION. 225 

dustrieSj in which different people would engage, would 
be fairly and naturally regulated bj the natural advan- 
tages of their soil and climate, both as to agriculture and 
manufactures and the carrying on of commerce. An 
advanced physical, intellectual, and moral people would 
still possess advantages over less favored races, but they 
would be advantages that belonged to it ; whereas, at 
present, the more depressed the state of its laboring 
population^ the greater the advantage possessed by a 
nation in the most desirable forms of industry. After 
such ultimate distribution, for any nation to endeavor to 
appropriate to itself, by a protective policy, more than the 
share of such occupations that came to it, as the result 
of an unrestricted commerce, would be entirely without 
justification, and would necessarily react unfavorably 
upon itself. Free trade would then secure to each peo- 
ple all that they were entitled to of the fruits of industry. 
There would be no distinctively agricultural, manufact- 
uring, or commercial nations. Each people would ]3ro- 
duce for itself everything in the production of which its 
labor was sufficiently efiScient as compared with that of 
its neighbors, and trade would be entirely in articles in 
which one nation possessed over others some natural (not 
artificial) advantage in soil, climate, or the character of 
its people. 

Free trade or protection is the morally best course 
for nations to pursue, according as either tends to bring 
about this ultimate and desirable equilibrium of human 
affairs with the least cost of labor and the least loss of 
annual production while it is being attained ; and, yet 
more important, that policy is most justifiable under which, 
when the equilibrium is attained, the uniform and world- 
wide margin of cultivation will be the highest. 



226 CAPITAL AND POPULATION. 

The ultimate equilibrium will be reached in three 
ways, viz. : by the actual transfer of labor from over- 
populated to under-populated lands, by the peopling of 
under-populated communities down to the margin of the 
over-populated ; and, in some degree, it is to be hoped, 
by the depopulation of over-populated lands. The redis- 
tribution of capital will automatically follow that of labor. 

Protection supplies an artificial stimulus to ail of these 
methods, while free trade acts as a positive discouragement 
to any transfer of labor and capital by any of them. The 
former, therefore, hastens our approach to the ultimate and 
desirable goal, while the latter greatly retards it. Free 
trade between an agricultural and a manufacturing nation 
tends to lower the margin of cultivation in the former 
and raise it in the latter, without any transfer of popula- 
tion. If population in both remains stationary, the two 
peoples wall finally possess the same margin, except as it 
is caused to differ by the expense of transporting between 
them the raw products and such manufactured goods as 
are consumed by laborers, and that margin will finally 
settle somewhere between their previous individual mar- 
gins, and will be nearer to the high margin of the agri- 
cultural or the low margin of the manufacturing country, 
according to the amount of unoccupied fertile land which 
the agricultural country possesses. If that amount is 
great, the ultimate margin will be nearly as high as her 
own previous one ; if small, it will be but little above the 
previous margin of the more sterile land. When this state 
is reached, further change will not occur. The popula- 
tion of the sterile country will still be very much larger 
in proportion to its fertility and extent than that of the 
fertile ; and this will necessitate the importation of a large 
proportion of its food and the exportation of many of the 



EFFECTS OF FREE TRADE AND PROTEOTIOK 227 

mamifactured goods required bj the laborers of the fertile 
land. The ultimate equilibrium attainable under free 
trade, the average margin being the same, will not, there- 
fore, be as benelicial to the world as the equilibrium that 
will result from protection, because production in the for- 
mer case will be saddled with the expense of a much great- 
er expenditure of labor in transferring commodities and 
raw products from place to place, and there will be a great 
increase in the amount of dead stock that will necessarily 
be held and stored up, which not only will cause an 
unnecessary abstinence in its accumulation, but will cause 
a larger share of the total product to accrue to the capital- 
ists and a smaller to the laborers in both countries. The 
final efficiency of labor will not be so great, and the 
difference will not be a trivial one, but a very substantial 
deduction from the sum of human enjoyments. But 
population will not remain stationary. It will increase 
in both lands. If such increase in both lands presses 
equally upon the food-supply, the relative margins will 
not be at all affected. They will both be lowered in an 
equal degree, and the final equality in margin will never 
be reached. If, however, as would actually be the case, 
the population of the fertile increased somewhat more 
rapidly than that of the sterile land, the two margins 
would approach each other, but at a declining rate, and 
the approach would probably cease while they were still 
a considerable distance apart. Whether any margin of 
cultivation shall advance or recede depends entirely upon 
the amount of comforts and subsistence which contents 
the laboring classes to such degree that they will consent 
to increase, keep up, or decrease their numbers. It is 
well settled that any sudden and great increase in real 
wages wiU not be wholly expended in an increase of 



228 CAPITAL AND POPULATIO]!^. 

population, and that any sudden and great decrease in 
wages will to a very considerable degree lessen the num- 
ber of marriages and births ; whereas a very gradual in- 
crease in real wages will be mainly or fully lost to the 
laborers by an increase in their number, while a very 
gradual decrease in real wages will rarely, if ever, lead 
to a decrease of population, but will result in the laborers 
adapting their wants to a lower standard of life. 

The first effect of large importations of cheap food 
will be to considerably raise real wages and the margin 
of cultivation, and this advantage will not be wholly lost 
to tbe laborers because it is a great and sudden advantage. 
The margin of cultivation in the country from which the 
food is imported is lowered not only by the increase of 
its own population, but by the increase of the population 
of the manufacturing nations to whom it exports food, or 
rather by the increase of the foreign manufacturing pop- 
ulation that depend for their subsistence upon imported 
food. The first effect of international intercourse to the 
agricultural nation will, therefore, be to cause a consider- 
able depression of the real wages of its laborers. This 
depression, being great and sudden, will be resisted by its 
laboring population refusing to increase at all, or at least 
as rapidly as before. The first effects, therefore, of free 
trade are to the restraint of the increase of the joint pop- 
ulation of the two countries, and are a check upon the 
lowering of their average margin of cultivation. The 
population of the world will not so rapidly increase, and 
the tendency will be for the population of the sterile 
country to increase more rapidly than before, and for the 
population of the fertile country to increase less rapidly ; 
and the latter effect will be somewhat greater in amount 
than the former. Free trade will confer a benefit upon 



EFFECTS OF FREE TRADE AND PROTECTION. 229 

the world in this respect in so. far as it raises the average 
margin, and a loss in cost of transport and dead stock 
in so far as it increases or sustains the disparity in popu- 
lation between different lands. At first the gain may 
overbalance the loss, but finally the loss w^ill be greater 
than the gain. 

As the two margins approach nearer and nearer to 
each other, the rise in real wages in the sterile and the 
fall in the fertile country will be more and more gradual. 
When a point is reached where the laborer in the sterile 
country uses the whole of the advantage gained in in- 
creasing the population, the margin there will become 
fixed, and the further approach of the two margins will 
be entirely due to the laborers in the more fertile land 
consenting to reduce the standard of life at which they 
will continue to increase their numbers. If they finally 
refuse to go on increasing before the two margins are 
brought together, they will no longer approach each other, 
but wdll remain permanently different. Under free trade, 
therefore, the rate of approach will not only be slower 
and slower as the margins approximate, but the approach 
itself will wholly cease while they are yet a considerable 
distance apart. The ultimate equilibrium of margins will 
not be coincident with uniformity of margin, and agri- 
cultural nations can never look forward to the time, if 
they neglect to adopt a protective policy, when they will 
not be under some disadvantage in the carrying on of 
those industries which possess the greatest inherent ad- 
vantages. They must also deny themselves the moral 
and political advantages of possessing a relatively large 
population. The strength and dignity of nations depend 
largely upon their numbers, and the ultimate distribution 
of population under free trade can not but lessen the mili- 



230 CAPITAL AND POPULATION 



I.- 



tarj power of agricultural peoples and their influence in 
the councils of the world. To attain such power and in- 
fluence has always been a proper national ambition, the 
chief aim of diplomacy, and one of the most prominent 
ends of political action. It is not, indeed, desirable if 
obtained by a loss of net revenue, but only when the net 
revenue remains the same or is in some degree increased. 
But, as I have shown, protection certainly increases the 
net national revenue of an agricultural nation as well as 
its population, and under such circumstances the increase 
of the latter is wholly beneficial, and an addition to the 
motives for the adoption of a protective policy not here- 
tofore noticed. 

The immediate effect of the adoption of a protective 
policy by an agricultural country is to raise its own mar- 
gin of cultivation and depress the margin of the manu- 
facturing nations with which it formerly traded. As 
long as population remains stationary the margins can not 
approach, nor will they if the increase be mutual and 
equal, or rather in proportion to the fertility of the un- 
occupied land. But the higher rate of real wages in the 
agricultural country will act as a powerful stimulus to 
population, and the lowered rate in the manufacturing as 
a powerful deterrent. Nevertheless, the two margins will 
never become identical if the laborers in the country with 
the higher margin ultimately refuse to adopt as low a 
standard of life as the laborers in the manufacturing 
country. This they would probably do, and, as laborers 
are more unwilling to descend from, than eager to rise 
above, their previous standard, the ultimate equilibrium 
of margin will more nearly approach uniformity than 
under free trade. 

But the difference in margins will tend to adjust the 



EFFECTS OF FREE TRADE AI^D PROTECTION". 231 

population in another way. The greater it is, the greater 
stimulus it will afford to emigration. A protected coun- 
try will inevitably draw to its shores a greater number of 
immigrants than before, not only because it can offer 
them a substantial increase in their real wages, but be- 
cause it can offer them a greater variety of employment. 
This will also enable it to attract a better class of work- 
men, those accustomed to earn and receive a higher than 
the average wages. A skilled artisan who emigrates to 
an unprotected country can only expect to be employed 
there as a common laborer. The inducement to leave his 
native land is very much lessened, and he will not come 
at all unless the wages of common labor in such country 
are greater than the wages which his skilled labor com- 
mands in his own. 

Protection no more than free trade secures, when the 
final equilibrium is reached, a uniform and universal mar- 
gin of cultivation, and does not therefore finally affect a 
distribution of population among nations in exact propor- 
tion to their extent and fertility, but it does this latter to 
a much greater degree than free trade, and does it more 
quickly. When the margins have approached each other 
to the same degree as under free trade, the disparity in 
population will not indeed be entirely overcome, but it 
will be very much less than if a protective policy had not 
been adopted. Under protection the disparity will be in 
exact or nearly exact proportion to the difference in the 
margins. Under free trade this will be only true of the 
agricultural population. The sterile and over-populated 
country will have in proportion to its fertility, besides its 
somewhat greater agricultural population, a very much 
larger manufacturing population. This will involve in 
the ultimate state a very great increase in the cost' of 



232 CAPITAL AND POPULATION. 

carriage between countries, and is far from being to tlie 
world as beneficial as the more equal distribution of pop- 
ulation effected by protection. Protection will not, in- 
deed, w^holly remove in the ultimate state the relative 
disadvantage of agricultural nations in engaging in the 
most advantageous employments, but it will lessen it 
more than the policy of free trade. 

The ultimate state under protection is, therefore, in 
several ways more desirable than that arrived at under 
free trade, and will be sooner reached. The price paid 
for this result is a present loss in the efficiency of the 
labor of the world. Whether the result is fully worth 
the price can not perhaps well be determined, but that it is 
worth a large part of it can not surely be denied. To 
whatever extent it is an equivalent, it morally justifies 
the adoption of the policy by agricultural nations. It 
must be noticed, also, that the loss in efficiency is a con- 
stantly declining one, and grows less exactly in proportion 
to the more equal distribution of population. And where 
such distribution is fully effected, the loss is turned into a 
gain, the efficiency of labor being then greater by what- 
ever saving is effected in cost of carriage and dead stock. 

We have yet to consider whether the ultimate uniform 
or average margin of cultivation will be higher or lower 
if agricultural nations generally adopt the policy of pro- 
tection. Although the determination of this point would 
more powerfully affect our decision as to the morality of 
protection than any of the results we have considered, I 
do not see how it can be arrived at. Whether the mar- 
gin shall be high or low depends mainly upon moral and 
social causes, and is only dependent upon economic causes 
in so far as they act upon the moral and intellectual status 
of the population. I confess myself unable to see any 



EFFECTS OF FREE TRADE AND PROTECTION. 233 

effect upon the morality or intelligence of the laboring 
classes of the world at large that can with certainty or 
even probability be attributed to either free trade or pro- 
tection, except that the latter causes those nations in /^»^/ ' 
which the position of the laborer is the highest to become 
wealthier and more powerful, while the former gives , 
power and influence to those in which the position of the '>' ^\ ** 
laborer is the lowest. This effect, however, I can not ' "^^ 
but regard as very important, and practically decisive of 
the question at issue. 

The authority of Mill in the following passage would 
seem to be in favor of the morality of protection, judged 
by the standards here set forth. He says, in Book III, 
chapter xvii, section 3 : 

" It is possible that one of the two countries may be altogether 
inferior to the other in productive capacities, and that its labor and 
capital could be employed to greatest advantage by being removed 
bodily to the other. The labor and capital which have been sunk 
in rendering Holland habitable, would have produced a much greater 
return if transported to America or Ireland* The produce of the;/^**:^ 
whole world Would be greater, or the labor less, than it is, if every- '" 
thing were produced where there is the greatest absolute facility 
for its production. But nations do not, at least in modern times, 7*^ 
emigrate en masse ; imdi while the labor and capital of a country 
TemamnTthe country, they are most beneficially employed in pro- 
ducing, for foreign markets as well as for its own, the things in 
which it lies under the least disadvantage, if there be none in which 
it possesses an advantage." 

Ricardo also, in his chapter on " Foreign Trades," page 
77, takes the same view. Of course, neither of them rec- 
ognize or could well recognize, holding the views they did 
as to the nature of capital, that protection tended to the 
readjustment of labor and capital they recognized as most 
beneficial. They both reason as if labor and capital, es- 



234 CAPITAL AND POPULATION. 

pecially the latter, could only be transferred by actual 
emigration, whereas this operates but to a very limited 
extent. The real and effectual method of transfer from 
one nation to another is, as to capital, its decline in one 
country and increase in another, due to a change in their 
relative rate of profit, and as to labor the restraint or 
stimulus to population due to a change in their relative 
margin of cultivation. They seem to regard both capital 
and population, once acquired, in the light of natural in- 
stead of artificial advantages, and never to have contem- 
plated their readjustments as possible in the manner I 
have indicated, although that is the manner by which the 
readjustment is mainly effected. 

Emigration, even when the emigrant is empty-handed, 
causes of itself a transfer of caj)ital from the mother to 
the adopted country. By lessening the supply of labor 
it raises proportional wages and lessens production and 
accumulation in the former, and by increasing the supply 
of labor it produces the contrary effect in the latter. It 
makes but little, and that only a temporary difference, 
whether or no immigrants bring with them the capital 
necessary to their employment. Their presence alone, 
whatever their poverty, allows of the creation of just the 
amount of capital which their labor can utilize, and very 
soon their adopted country is as rich as economic law al- 
lows, and she can be no richer, however much wealth is 
transferred bodily to her from other lands. 



CHAPTEK XYI. 



TAXATION. 



The recognition of tlie tendency of capital to outstrip 
population, not only affords a principle by which inter- 
course with foreign nations should be regulated, but also 
assists in determining the policy that should be pursued 
in the internal affairs of a people, especially in so far as 
such internal affairs relate to taxation. If there is a ten- 
dency for accumulation, carried beyond a certain and fre- 
quently recurring point, to lessen production, the effect of 
such tendency can certainly be largely counteracted by a 
judicious fiscal system. This being so, the principle that 
as far as possible taxes should come from accumulations, 
and not from wages, profits, or unproductive consumption, 
is surely as important as any of the justly celebrated 
principles enunciated by Adam Smith. 

All direct taxation,^ of profits as such, or indirect 
through wages or upoii unproductive consumption, to 
such degree or in such manner as leads to a decrease in 
the value unproductively consumed by the government 
and the community combined, lessens the productive ca- 
pacity of the nation, it may be, by an amount far greater 
than that of the tax itself. It has hitherto been held 
that taxes that lowered the rate of profit acted injuriously 
only as they lessened the amount of the sum from which 



236 CAPITAL AND POPULATION. 

accumulations could continue to be made. But we have 
seen tliat such accumulations would have gone first to in- 
crease the dead stock or idle capital, and that the amount 
of active stock or utilized capital, other things being 
equal, varies inversely with the amount of dead stock. 
This effect, therefore, would lead to an increased rather 
than a decreased annual production. Such a tax is, in 
fact, rarely or never followed by an increased production, 
but it is not because of the consequent decrease of capi- 
tal stock, active and passive together, but because the de- 
crease in the rate of profit has lessened the amount of 
capital that can be productively employed. It has de- 
creased the normal ratio of active to dead stock, and the 
failure to accumulate further only partially counteracts 
the consequent disproportion between them. 

In countries where population tends to outstrip capi- 
tal, a tax on profits does, indeed, discourage production, 
as well by the consequent decrease in capital as by the 
accompanying decrease in the rate of profit ; but where 
the tendency is the other way, the first result, instead of 
intensifying, counteracts the second, and finally readjusts 
the equilibrium of active to dead stock to a new and 
lower ratio. 

Taxes, on the other hand, that are paid wholly from 
funds that would otherwise have been added to capital, 
provided, of course, they are not so great as to cause the 
increase of capital to lag behind that of population, are 
met entirely by an increase of production. If such taxes 
had not been levied, the same amount of production 
might have gone on for a while; but the resulting ac- 
cumulations would have been added to dead stock, and 
been followed very soon by a decrease in the amount of 
stock productively employed, and the total production 



TAXATION. 237 

would have eventually been lessened. The normal ratio 
between dead and active stock can only be readjusted 
by a decrease of production, or by an increase of un- 
productive consumption. A tax drawn wholly from 
accumulations, being really an increase of unproductive 
consumption, adjusts it in the latter, and much the more 
advantageous, way. When such a tax is wisely expended 
it is an unmixed advantage to the nation, and even when 
unwisely used it is of no positive disadvantage. 

We are entitled, then, to lay it down, not only as a, 
but as the, fundamental principle of taxation, that it 
should come as far as possible from funds that would 
otherwise be added to capital ; but in effecting this it 
must be done without affecting the rate of profit, as the 
effect of lowering that will overbalance the advantage of 
lessening accumulations. 

To reach this fund, from which taxation should 
wholly come, is a very difficult matter, because every 
individual on whom taxation falls seeks to meet it, not 
from the funds he is accustomed or desirous of adding 
to his capital, but from those he devotes to unproduc- 
tive consumption. Personal interests here are in direct 
conflict with social, with the result that a theoretically 
perfect system of taxation is impossible of attainment, 
especially as the tax which comes nearest in principle to 
the correct one, and from which any considerable revenue 
can be raised, is open to very serious moral objections, 
and to most minds seems to discriminate very unjustly 
between individuals. I refer, of course, to a graduated 
income-tax. A tax upon incomes strictlyproportional 
iTaTtax upon profits, and therefore objectionable. In so 
far as it is a tax upon wages, unless indeed they are ex- 
ceptionally high, it is, of course, transferred eventually 



233 CAPITAL AND POPULATION. 

to profits, and can not but result in a decrease of pro- 
duction ; but, where small incomes are wholly exempt, 
and moderate incomes but lightly taxed, the weight of 
the tax falls almost wholly upon the accumulating class, 
and that very nearly in proportion to their ability and 
willingness to accumulate. This has hitherto been ad- 
vanced as a fatal objection to such a tax both economic- 
ally and morally. We have seen that economically it is^ 
■ »©t ^unwise, but, on the contrary, nsc^t beneficial to the 
interests of the community at large, and it is certainly 
just and right that the class whose advancement of their 
individual interest most conflicts with the interests of 
society should be called upon to bear very much more 
of the public burdens than would otherwise fall to them, 
especially when their so doing will partially, and may 
even wholly, obliterate the injurious effects to others of 
their hitherto too rapid growth in wealth, and that with- 
out any diminution, but rather to the increase, of their 
wealth as a class, although the distribution of their wealth 
among themselves will be affected. Anything that in- 
creases the average annual production increases in some 
proportion the capital that can be utilized, and conse- 
quently the amount that can be accumulated ; and that 
capital should be more equally distributed has long been 
recognized as a desirable social change. The objections 
to a graduated income-tax are therefore reduced solely 
to its inquisitorial nature, and to the deceit and perjury 
consequent upon the conflict of individual and social 
interests. Great as these objections are, they do not 
seem insuperable when the economic action of such a 
tax is considered. 

A legacy-tax, graduated or not, but better if gradu- 
ated, also meets the conditions of the principle that taxa- 



TAXATION. 239 

tion should be drawn from accumulations, and is not open 
to the same moral objections. A tax upon gifts above a 
certain amount would not only be economically advisable, 
but probably necessary, to prevent evasions of taxes upon 
legacies and inheritances, and also, perhaps, upon income. 
In the following passage from Mill, Book Y, chapter 
ii, section 7, it would certainly seem that he fully in- 
dorses the views here advanced. I am unable to put any 
construction on his language other than that he means to 
assert that, in England at least, capital so presses upon 
population that taxes on capital are fully paid by a saving 
of the waste of capital that would else occur ; nor am I 
able to imagine any more complete admission than this, 
that over-accumulation is not only possible, but an event 
of frequent and periodical occurrence, in civilized com- 
munities. Mill, indeed, did not perceive that over-accu- 
mulations are not only necessarily wasted, but that they 
involve a partial cessation of industry while such waste is 
taking place and until it is accomplished. Other than 
this last particular his views certainly seem to coincide 
with mine. The passage reads : 

"All taxes, therefore, are in some sense partly paid out of capi- 
tal ; and in a poor country it is impossible to impose any tax which 
will not impede the increase of the national wealth. But in a coun- 
try where capital abounds and the spirit of accumulation is strong, 
this effect of taxation is scarcely felt. Capital having reached the 
stage in which, were it not for a perpetual succession of improve- 
ments in production, any further increase would soon be stopped, 
and having so strong a tendency even to outrun those improvements, 
that profits are only kept above the minimum by emigration of cap- 
ital, or by a periodical sweep called a commercial crisis — to take 
from capital by taxation what emigration would remove or a com- 
mercial ci'isis destroy, is only to do what either of those causes 
would have done, namely, to make a clear space for further saving. 

" I can not, therefore, attach any importance, in a wealthy coun- 
11 



240 CAPITAL AND POPULATION. 

try, to the objection made against taxes on legacies and inheritances, 
that they are taxes on capital. It is perfectly true that they are so. 
As Eicardo observes, if £100 are taken from any one in a tax on 
houses or on wine, he will probably save it, or a part of it, by living 
in a cheaper house, consuming less wine, or retrenching from some 
other of his expenses ; but if the same sum be taken from him be- 
cause he has received a legacy of £1,000, he considers the legacy as 
only £900, and feels no more inducement than at any other time 
(probably feels rather less inducement) to economize in his expend- 
iture. The tax, therefore, is wholly paid out of capital ; and there 
are countries in which this would be a serious objection. But, in 
the first place, the argument can not apply to any country which 
has a national debt, and devotes any portion of revenue to paying it 
off; since the produce of the tax, thus applied, still remains capital, 
and is merely transferred from the tax-payer to the fund-holder. 
But the objection is never applicable in a country which increases 
rapidly in wealth. The amount which would be derived, even from 
a very high legacy-duty in each year, is but a small fraction of the 
annual increase of capital in such a country ; and its abstraction 
would but make room for saving to an equivalent amount; while 
the effect of not taking it, is to prevent that amount of saving, or 
cause the savings, when made, to be sent abroad for investment. A 
country which, like England, accumulates capital not only for itself 
but for half the world, may be said to defray the whole of its public 
expenses from its overflowings ; and its wealth is probably at this 
moment as great as if it had no taxes at all. What its taxes really 
do is to subtract from its means not of production but of enjoy- 
ment ; since whatever any one pays in taxes he could, if it were not 
taken for that purpose, employ in indulging his ease or in gratifying 
some want or taste which at present remains unsatisfied." 

If Mill had borne in mind and fully considered the 
above words and all that they imply, he conld hardly 
have expressed himself as he does later on in Book Y, 
chapter ii, section 3, in which he says : 

"Both in England and on the Continent a graduated property- 
tax has been advocated on the avowed ground that the state should 
use the instrument of taxation as a means of mitigating the inequal- 



TAXATION. 241 

itie3 of vvealtli. I am as desirous as any one that means should be j 
taken to diminish those inequalities, but not so as to relieve the i 
prodigal at the expense of the prudent. To tax the larger incomes 
at a MgJier percentage than the smaller^ is to lay a tax on industry 
and economy ; to impose a penalty on people for hating tcorlced 
harder and saved more than their neighbors. It is not the fortunes 
which are earned^ hut those which are unearned^ that it is for the 
public good to place under limitation. A just and wise legislation ■ 
would oMtain from holding out motives for dissipating rather than 
saving the earnings of honest exertion. Its impartiality between 
competitors would consist in endeavoring that they should all start 
fair, and not in hanging a weight upon the swift to diminish the 
^stance between them and the slow. Many, indeed, fail with 
greater efforts than those with which others succeed, not from dif- 
ference of merits but difference of opportunities ; but if all were 
done which it would be in the power of a good government to do, 
by instruction and by legislation, to diminish this inequality of op- 
portunities, the difference of fortune arising from people's own earn- 
ings could not justly give umbrage. With respect to the large for- 
tunes acquired by gift or inheritance, the power of bequeathing is 
one of those privileges of propercy which are fit subjects for regu- 
lation on grounds of general expediency ; and I have already sug- 
gested, as a possible mode of restraining the accumulation of large 
fortunes in the hands of those who have not earned them by exer- 
tion, a limitation of the amount which any one person should be 
permitted to acquire by gift, bequest, or inheritance. Apart from 
this, and from the proposal of Bentham (also discussed in a former 
chapter),* that collateral inheritance in case of intestacy shonld 
cease and the property escheat to the state, I conceive that inherit- 
ances and legacies, exceeding a certain amount, are highly proper 
subjects for taxation, and that the revenue from them should be as 
great as it can be made without giving rise to evasions, by donation 
during life or concealment of property such as it would be impos- 
sible adequately to check. The principle of graduation (as it is 
called), that is, of levying a larger percentage on a larger sum, 
though its application to general taxation would be in my opinion 
objectionable, seems to me both just and expedient as applied to , 
legacy and inheritance duties/'^^^^^^TTul r'^'V^. Ivu^vi.., *tM ,: Jrw^v!^ 
* Supra, Book II, chapter ii. >^^^^ y^X t 



2J:2 CAPITAL AND POPULATION. 

In one passage lie objects to a tax, in that it tends to 
discourage accumulation ; and in the other he rebuts the 
same objection against another tax, on the ground that 
such accumulations will inevitably be wasted. But there 
are not the moral objections he urges to a graduated tax 
upon property and incomes, or upon inheritances, legacies, 
and gifts. The tendency of such taxes is to discourage 
accumulation, which, if not carried too far, is an unmixed 
benefit. Their imposition tends not only to a more equal 
distribution of wealth, but also to the prolongation of 
the periods of large productiveness. As great accumu- 
lations take away from the poorer members of a commu- 
nity something of their ability to themselves accumulate, 
it certainly seems just that those whom society protects 
in inflicting an injury upon itself should be called upon 
to support more than their share, if not all, of the public 
burdens. There is one peculiar advantage possessed by 
such a tax which should be noticed, viz., that the com- 
munity, including those who pay it, wdll be richer instead 
of poorer by it, even if the proceeds of the tax be wasted. 
The increase of industry to which it leads will add more 
to the general income than the tax itself will subtract 
from it, because only a part of such increased produc- 
tion will be added to savings, while the tax is wholly a 
deduction from past accumulations. The conditions, 
therefore, favorable to a large production will be pro- 
longed. 

In his discussion of the income-tax, which follows the 
passage we have quoted, Mill argues in favor of exempt- 
ing such a proportion of life-incomes from taxation as 
would probably be saved. This would indeed be a bene- 
fit to the families of annuitants, as it would help to pro- 
vide for them after the death of the annuitant, but its 



TAXATION. 243 

effect upon accumulation would be against the interest of 
the public, instead of in favor of it, as Mill supposes. 

Taxes upon rental also meet economic conditions, as 
the unproductive consumption of the government exactly 
takes the place of the lessened unproductive consumption 
of the landlords, and therefore, while lessening accumula- 
tion, they do not otherwise affect the rate of profit. Mr, 
Henry George seems to think that a sum could be derived 
from this source sufficient, not only to meet all the ex- 
penses of government, but to allow a vastly increased ex- 
penditure by government for social improvement. That 
a large sum could be so derived admits of no doubt, but 
that Mr. George considerably exaggerates the amount is 
also evident. Economic rent is but a small portion of 
what is ordinarily called rent. A tax upon aggregate rent \ 
would be mainly a tax upon profits, and would discourage ' 
agricultural and urban improvement, nor do I understand 
Mr. George to advocate it ; but the rent of agricultural 
land is very largely composed of the profits due to the 
improvements upon it. It is only of town-lots and villa- 
sites that economic rent furnishes a large proportion of 
the rental in the popular sense of the word. If, however, 
the whole of economic rents were reappropriated by so- 
ciety, it would undoubtedly afford a revenue, which w^ould 
obviate any necessity of taxing profits in any way or 
shape, and the economic advantages resulting from this 
would be very great. I agree with Mr. George that so- 
ciety would be justified in resuming its right to the entire 
economic rental of its land, but can not regard his pro- 
posal to do so immediately and without compensation as 
anything but the most arbitrary confiscation. Society 
has parted with its rights in the premises for valuable 
though inadequate compensation, and though we may 



2M CAPITAL AND POPULATION. 

allow tliat one generation can not grant rights of this 
character belonging to its successors, it certainly can, 
if it chooses, part with its own. Immediate resumption 
of economic rentals without full compensation would 
therefore be most unjust, and the violation of an implied 
contract. More, however, can be said in favor of a grad- 
ual resumption without compensation. The past and the 
present rights are gone. However inadeqnate the price, 
the bargain has been made and must be adhered to, but 
the grant may be held void as to the generation coming 
into being, and there would be no injustice in a law re- 
'; suming the proprietary right to the rental of each future 
year, in proportion to the ratio of the inhabitants of the 
country born after its passage to those born before. Such 
a gradual resumption would v/ork neither hardship nor 
injustice, and would in time attain for ns all the advan- 
tages that a sudden and unjust resumption could do, and 
that without the shock to society that would follow a 
sudden resumption with or without compensation. 

Mr, George entirely miscalculates the effect npon 
" progress and poverty " that would follow the resump- 
tion of economic rent by the government. It would 
make no difference in the price of food or of manufact- 
ured articles whether the farmer and the manufacturer 
paid the rental to the government, to the landlords, or to 
themselves as landlords. The sole relief that would ac- 
crue would be the consequent relief from other taxation. 
But the laborer is not, indeed can not be, taxed ; at first, 
probably, he would reap some benefit as a consumer in so 
far as taxation is an element of cost ; bnt as soon as popu- 
iiv-\>\ lotion had increased, his real wages wonld be the same as 
before, and the whole benefit derived from the decrease 
of other taxation would accrue to his employers by ena- 



TAXATION. 2i5 

bling them to utilize a larger amount of capital. The 
final result would simply be a transfer from landlords to 
capitalists, and an increase in the inequality of individual 
fortunes. 

The position of the laborer can be permanently im- 
proved in but two ways : first and mainly, by his refrain- 
ing frorn^ increasing population ; and, secondly, by such a 
readjustment of social forces as shall result in his stead- 
ier and more efficient employment. 

"While to some extent agreeing with Mr. George, I 
can not therefore look hopefully upon his proposed expe- 
dient for ameliorating the condition of laborers. I do 
not, however, despair of their future state, because I see 
in co-operation the solution, and the only final solution, 
of "the conflict between labor and capital. Yfhile its im- 
mediate success can not be expected, because it presup- 
poses an intelligence and morality not yet attained by our 
lower classes, its gradual adoption is certain to take place, 
small as is the foothold it has yet obtained, because it 
contains within itself an educative principle that will 
eventually supply the needed intelligence and morality. 

Taxes on necessaries can not but lower the rate of 
profit, and are always unwise. Taxes on luxuries may or 
may not lower the rate of profit. If they lead to an in- 
crease in the value of what is unproductively consumed, 
they will raise and sustain the rate, and will act benefi- 
cially. If they lead to a decrease of unproductive con- 
sumption, they will decrease the rate of profit, and will 
eventually lessen industrial activity. When they are 
laid on a few articles and are excessive in amount, they 
may sometimes do the latter, but when laid upon many 
articles their operation is similar to that of a graduated 
income-tax. As the proportion of income spent in luxu- 



246 CAPITAL AND POPULATION 

ries is largest, as a general rule, in large incomes, such 
taxes curtail the amount of the funds from which accu- 
mulations are ordinarily made, and lead to an increase of 
industrial activity ; but they are much inferior in their 
action to a graduated income-tax, because they do not 
operate heavily enough against the large incomes, and 
because many of the rich escape their due proportion of 
them by unduly curtailing their expenditure. These are 
pre-eminently the accumulating class, and the one that 
the good of society demands should be most heavily 
taxed. But, just in proportion as they monopolize the 
avenues of investment to the exclusion of their fellov^- 
citizens, for which privilege they should certainly be 
made to pay, do they escape the taxes upon luxuries^ 
The special advantage of taxing luxuries is that, as in the 
main, luxurious expenditure increases in greater propor- 
tion than income, it is really a slightly graduated tax upon 
incomes. If such taxes are relied upon, a somewhat 
heavier tax, according to our principles, should be laid 
upon the excess of income above expenditure. 

Perhaps no better test of the correctness of the prin- 
ciples advocated in this work, as compared with Mill's 
views, can be found than the effect produced upon a na- 
tion's industry by its engaging in war, with the consequent 
increase in loans and taxes. 

To obtain Mill's views I make the follov/ing extract 

from Book Y, chapter vii, section 1 : 

" Section 1. The question must now be considered how far it is 
right or expedient to raise money for the purposes of government, 
not by laying on taxes to the amount required, but by taking a por- 
tion of the capital of the country in the form of a loan and charg- 
ing the public revenue with only the interest. Nothing need be 
said about providing for temporal wants by taking up money ; for 
instance, by an issue of exchequer bills, destined to be paid off at 



TAXATION. 247 

farthest in a year or two, from the proceeds of the existing taxes. 
This is a convenient expedient, and, when the government does not 
possess a treasure or hoard, is often a necessary one, on the occur- 
rence of extraordinary expenses, or of a temporary failure in the 
ordinary sources of revenue. What we have to discuss is the pro- 
priety of contracting a national debt of a permanent character; 
defraying the expenses of a war or of any season of diflficulty by 
loans, to be redeemed either very gradually and at a distant period, 
or not at all. 

" This question has already been touched upon in the first book.* 
We remarked that if the capital taken in loans is abstracted from 
funds either engaged in production or destined to te employed in it, 
their diversion from that purpose is equivalent to taking the amount 
from the wages of the laboring classes. Borrowing, in this case, is 
not a substitute for raising the supplies within the year. A govern- 
ment which borrows does actually/ take the amount within the year^ 
and that too 'by a tax exclusively on the laboring classes — than which 
it could have done nothing worse if it had supplied its wants by 
avowed taxation; and in that case the transaction and its evils would 
have ended with the emergency ; while by the circuitous mode adopted 
the value exacted from the laborers is gained^ not by the state, but by 
the employers of labor, the state remaining charged with the debt 
besides, and with its interests in perpetuity. The system of public 
loans, in such circumstances, may be pronounced the very worst 
which, in the present state of civilization, is still included in the 
catalogue of financial expedients. 

" We, however, remarked that there are other circumstances in 
which loans are not chargeable with these pernicious consequences, 
namely: first, when what is borrowed is foreign capital, the over- 
flowings of the general accumulations of the world ; or, secondly, 
when it is capital which either would not have been saved at all un- 
less this mode of investment had been open to it, or after being 
saved would have been wasted in unproductive enterprises or sent 
to seek employment in foreign countries. When the progress of 
accumulation has reduced profits either to the ultimate or to the 
practical minimum — to the rate, less than which would either put a 
stop to the increase of capital, or send the whole of the new accu- 

* Supra, p. 49. 



218 CAPITAL AND POPULATION". 

mulations abroad — government may annually intercept these new 
accumulations without trenching on the employment or wages of 
the laboring classes in the country itself, or perhaps in any other 
country. To this extent, therefore, the loan system may be carried 
without being liable to the utter and peremptory condemnation which 
is due to it when it overpasses this limit. What is wanted is an in- 
dex to determine whether, in any given series of years, as during 
the last great war, for example, the limit has been exceeded or not." 

We have nothing to do here with the question as to 
the advisability of loans, but with the assertion, in the 
sentences italicized, that such loans are entirely at the ex- 
pense of the laboring class, if they raise the rate of profit 
and depress proportional wages. According to Mill, when 
such loans are made, they should be followed by some 
cessation of industry. Is this, in fact, what occurs ? Can 
it be denied that the laboring class is esj)ecially prosper- 
ous under such circumstances ? Mill himself does not 
attempt to deny it, but endeavors to explain it away in 
the succeeding paragraph. He says : 

^^ Such an index exists, at once a certain and obvious one. Bid 
the government hy its loan operations augment the rate of interest ? 
If it only opened a channel for capital which would not otherwise 
have been accumulated, or which, if accumulated, would not have 
been employed within the country, this implies that the capital 
which the government took and expended could not have found 
employment at the existing rate of interest. So long as the loans 
do no more than absorb this surplus, they prevent any tendency to a 
fall of the rate of interest, but they can not occasion any rise. 
When they do raise the rate of interest, as they did in a most ex- 
traordinary degree during the French war, this is positive proof that 
the government is a competitor for capital with the ordinary channels 
of productive investment, and is carrying off not merely funds which 
would not, but funds which would have found productive employment 
within the country. To the full extent, therefore, to which the loans 
of government during the war caused the rate of interest to exceed 
what it was before, and what it has been since, those loans are charge- 



TAXATION. 249 

able with all the evils lohich have been described. If it be objected 
that interest only rose because profits rose, I reply that this does not 
weaTcen but strengtliens the argument. If the government loans 
produce the rise of profits hj the great amount of capital which 
they absorb, by what means can they have had this effect unless ,i 
by lowering the wages of labor ? It will perhaps be said that what / 
kept profits high during the war was not the drafts made on the 
national capital by the loans, but the rapid progress of industrial 
improvements. This, in a great measure, was the fact, and it no j 
doubt alleviated the hardship to the laboring classes, and made the 
financial system which was pursued less actively mischievous, but 
not less contrary to principle. These very improvements in indus- 
try made room for a large amount of capital ; and the government, 
by draining away a great part of the annual accumulations, did not 
indeed prevent that capital from existing ultimately (for it started 
into existence with great rapidity after peace), but prevented it 
from existing at the time, and subtracted just so much while the \ 
war lasted from distribution among productive laborers. If the • 
government had abstained from taking this capital by loan, and had 
allowed it to reach the laborers, but had raised the supplies which 
it required by a direct tax on the laboring classes, it would have 
produced (in every respect but the expense and inconvenience of col- 
lecting the tax) the very same economical effects which it did pro- 
duce, except that we should not now have had the debt. The course '' 
it actually took was therefore worse than the very worst mode which ; 
it could possibly have adopted of raising the supplies within the \ 
year ; and the only excuse or justification which it admits of (so far 
as that excuse could be truly pleaded) was hard necessity — the im- 
possibility of raising so enormous an annual sum by taxation, without 
resorting to taxes which, from their odiousness or from the facility 
of evasion, it would have been found impracticable to impose." 

This explanation, which, of course, I do not at all allow 
to be a valid one, at the best is only that of one particular 
occurrence of the fact so antagonistic to his theories. 
How lame and impotent it is, is apparent when it is re- 
membered that an increase of industrial activity always (^ 
occurs in nations while at war ; and the higher the war I v. 






*\> <.t>- -Htf 



250 CAPITAL AND POPULATION. 

expenditures and loans force the rate of interest and of 
profit, provided, of course, that the security of capital is not 
imperiled by invasion, the greater the industrial activity 
whenever the drain of capital is greater than the drain 
of labor to the army. When the drain of the latter is the 
greater, the contrary effect always has been produced. 

The reasoning is utterly oblivious of the fact that the 
benefit which the laboring class receives from capital is 
solely from such portion of the gross capital as is actively 
employed in production. Dead stock can not be convert- 
ed into wages until it becomes active, and the larger the 
amount of dead stock the less the temptation to capitalists 
to employ it productively. The drain upon dead stock 
made by the government loans in time of war, even 
when it is far greater than what would carry off the 
sums that would otherwise be loaned abroad or consumed 
in speculation, is of great and immediate advantage to the 
laborers. Productive consumption is vastly increased, 
and the wages-fund consequently enlarged. There is a 
fall of proportional wages, but the fall of proportional 
wages is more than made up to the laborers by more of 
them being kept busy. This accounts for what has hith- 
erto been somewhat of a puzzle to economists, the excep- 
tional prosperity of a country engaged in war, and the 
continuance of that prosperity after the war is closed, 
if the increased industry has not already repaired the 
breaches which the war expenditure has made in capital. 
The advantage to labor would be greater if it were not for 
the drain upon their numbers by enlistment and draft. 
This operates as a counterbalance to the drain of capital, 
and if it equals or exceeds it, either no increase or a de- 
crease of industrial activity will ensue, because it will 
raise wages and lessen the wages-fund. 



CHAPTEE XVII. 

SOME OTHEK EFFECTS OF THE LAW. 

The recognition that capital is limited by popula- 
tion and tends constantly to overpass such Kmit, will 
go far toward the solution of many other eagerly-dis- 
cussed problems. 

The effect of the creation, the funding, and the repay- 
ment of national indebtedness upon production and dis- 
tribution, is such a problem. Some have gone so far as 
to assert a national debt to be a national blessing ; and to 
a certain degree the assertion can be sustained. Besides 
the national securities being so readily negotiable and so ; 
satisfactory as collaterals, that their presence materially ' 
aids the efficiency of the credit system, it may also be \ 
affirmed of national indebtedness that, in so far as its ere- \ 
ation is at the expense of superfluous capital — i. e., in so 
far as it only appropriates funds whose existence would j 
discourage future production — it acts as a stimulus to in- f- 
dustry, temporary to be sure, but effective and beneficial 
as long as it lasts. This remark, however, only applies to 
such part of the debt as is due to the individuals compos- 
ing the indebted nation. What a government borrows of 
foreigners fails to deplete its own dead stock, and conse- 
quently to augment its own rate of profit and its industrial 



252 CAPITAL AND POPULATION. 

activity. Such loans are not even of temporary benefit to 
industry, unless tliey are employed productively for wise 
[ projects, which would not else have been undertaken at 
I all. They are only justifiable to nations whose existence 
1 is threatened, or who are in need of great internal im- 
provements that they lack means to provide for them- 
selves. But so far as a nation's loans are drawn from the 
^ - funds of its own citizens, their first effect is to increase 

> I both the rate and the sum total of profits, and to increase, 
, ; though in a somewhat less degree, the total of the wages- 

> I fund and the rate of real wages. 

After the loans are completed and expended, and 
after capital has again adjusted itself to population, this 
beneficial effect ceases, and national indebtedness becomes 
more or less detrimental to production. In so far as the 
consequent taxation adds to the cost of production, it less- 
ens the benefit of foreign trade. Though this is a serious 
loss, it is so well recognized a result of national indebted- 
ness that it does not demand from us a notice adequate to 
its importanace, and its consideration need not further 
detain us. 

Whatever of the proceeds of taxation is returned in the 
form of interest to its own citizens, does not, of course, 
affect the net income of the nation, and, except as it 
stimulates accumulation, has no influence upon produc- 
tion. Whatever is so paid to foreigners is, on the other 
hand, altogether at the expense of the net national in- 
come, and can not but result in a total loss, except as it 
is counterbalanced by benefits still enjoyed through the 
employment of the original loan in projects for which 
the national capital was insufficient. Whatever this loss 
of net income, the gross annual product of the indebted 
nation need not be decreased, provided the consequent 



SOME OTHER EFFECTS OF THE LAW. 253 

loss of revenue is not so great as to forbid tlie accumu- 
lations necessary for its wages - fund and fixed capital. 
When payments of interest or other remittances to for- 
eigners (such, for instance, as tribute or for funds ex- 
pended by absentees) are so great, as is the case with Ire- 
land, India, and a few other unfortunate lands, that they 
cause population to press upon capital, not only is the net 
revenue of such a people reduced, but the gross product 
as well. 

That foreign indebtedness need not decrease the gross 
product of a nation is, however, only true of its amount, 
and not of its value. As has been ably shown by Mill, 
the equation of international demand is always disas- 
trously affected, to a creditor nation, by its remittances 
on account of absentees, tribute, loans, interest, or profits. 
The value of its gross product can not but diminish, al- 
though its amount may not do so as long as its 23opulation 
remains the same, and its capital is not too much depleted 
or supplanted. But the effect of this national loss in 
depressing real wages, by lessening the stimulus to 
population, will finally lead to a decrease of the gross 
produc t also, at least relatively to what it might have 
been, if such foreign indebtedness had never been in- 
curred. 

Repayment of the principal of its national debt to its 
own citizens is wholly an addition to the capital of the 
country, unless the necessary funds are derived from a 
tax upon capital. In so far as it adds to capital, it, of 
course, disturbs its ratio to population, and tends to bring 
about, sooner than it would otherwise occur, the period 
of industrial stagnation that inevitably results from over- 
accumulation. JSTational net income and gross product 
are both diminished by the process. When such repay- 



254 CAPITAL AND POPULATIO]^. 

ment is made to foreigners, production is not disturbed 
(andj in so far as the taxation, from whicli tlie funds so 
expended are derived, depletes the national capital, pro- 
duction is even increased), but as the equation of inter- 
national demand is injuriously affected, its value, though 
not necessarily its amount, is lessened. 

All of the above remarks apply as well to private as to 
public foreign indebtedness, except that private borrowing 
abroad, being always for productive purposes, affects the 
normal ratio of national capital to population, by allowing 
foreign capital to monopolize the avenues for investment, 
by which alone home accumulations can be utilized or 
retained. This not only hastens the period when capital 
will be found to have exceeded its limits, and thus lessens 
industrial activity and production, but it also allows for- 
eigners to possess themselves of profits that would else- 
wise have very soon accrued to the future savings of 
home capitalists. 

There is no economic fallacy more firmly fixed in the 
popular mind than the belief that a nation derives advan- 
tage from borrowing of its neighbors. We now see how 
ansidious and disastrous such a policy really is, and that 
whatever interest and profits are paid on such loans are 
purely~and simply gifts, in all cases where a tendency 
j exists in tlie indebted nation for capital to increase more 
rapidly than population. Indeed, such interest and prof- 
its are far from expressing the real amount of such gifts 
— a sum, almost as great, must be added as a consequent 
of the resulting disturbance of the equation of interna- 
tional demand. 

Within the country itself, the effect of a national debt 
on the distribution of wealth is also undesirable. It in- 
creases the gross amount of profits at the expense of the 



SOME OTHER EFFECTS OF THE LAW. 255 

wages-fund and real wages. The capital of such country 
will soon be just what it would have been if the debt had 
not been created, and it will demand and receive the same 
rate and amount of profit. As the gross product is not 
increased, whatever income capitalists obtain from the 
advances they have made to the government, is ulti- 
mately derived, through prices, from the consumers, and, 
in so far as laborers are consumers, from real wages. Al- 
though, therefore, the immediate effect of the payment 
of the national obHgations is detrimental to the laboring 
classes, on account of the decreased production and less- 
ened employment it temporarily causes, the ultimate ef- 
fect will be beneficial, in that it will give them a larger 
normal share of the gross product. 

Our principle also profoundly affects the controversy 
between the bi-metallists and the advocates of a single 
standard, and should, I think, settle the controversy in 
favor of the former. The claim of the latter that the rela- 
tive value of the two precious metals depends upon the cost 
of production, and cannot be arbitrarily fixed, as it must be, 
if both metals are to be used, seems to me fallacious. So 
much the greater part of their value is due to their use as 
mediums of exchange, that all nations agreeing to use them 
interchangeably in any fixed proportion, not too much at 
variance with their value for other purposes, would reduce 
the two metals, for the purpose of scientific discussion, to 
one commodity. As the utility of the two would be not 
only equal but identical, the effect of any relative increase 
in the cost of the production of either would not change 
their relative value, but only enhance the rentals of the 
mines from which the other was exploited. Thus, if the 
only use of wheat or of rye was to make bread, and the 
bread from either grain was absolutely indistinguishable 



256 CAPITAL AND POPULATION. 

from that made from the other, the relative value of the 
two grains could never differ. If an improvement in 
agriculture should enable wheat to be raised at less than 
its former cost, while the production of rye was unaf- 
fected, wheat would not thereby sell for less than rye, 
but more of it and less of rye would be grown, and lands 
adapted to wheat would bring higher rentals. The real 
utility of both gold and silver is artificial and identical, 
and their value in relation to each other can consequently 
be arbitrarily fixed, if only the agreement to do so be 
complete. Their value as compared with articles of nat- 
ural utility is not subject, of course, to arbitrary adjust- 
ment, but their value relative to each other can be, at 
least, within the limit that neither shall be cheaper than 
its value for other utilities than that of serving as a me- 
dium of exchange. 

j Assuming that the ratio between the two can be fixed, 
the demonetization of silver amounts simply to a world- 
wide contraction of the currency. 

The influence of price on industrial activity is not 
sufl&ciently recognized, nor can it be, while the amount 
of activity is supposed to increase or decrease with the 
amount of capital. The principle here advanced that, 
under our present economic organization, profit being the 
sole stimulus to production, industrial activity will vary 
with the rate of profit, within the limit of the physical 
sufficiency of capital to supply the fund for wages, leads 
us to attach a new importance to the phenomena of 
price. 

I A rise in prices, however equal and uniform it may 

/ be, transfers value from the creditor to the debtor class. 

' This encourages production, not only because the latter 
are pre-eminently the class upon whom the amount of 



SOME OTHER EFFECTS OF THE LAW. 257 

production depends, but because, in such times, the risk 
of giving credit being lessened, the credit system itself is 
extended. But a rise in prices is never equal and uni- 
form. Any difference in the prices of different material 
commodities, however it may change the direction, has 
little or no influence upon the gross amount of produc- 
tion ; but other commodities advancing in price more 
rapidly than labor, stimulates production, because thereby 
profits are enhanced. Any rise in the price of labor 
more rapid than that of material commodities, or decline 
in the latter more rapid than the decline in wages, has, 
of course, the contrary effect, and serves to limit and re- 
press production. 

There is one peculiarity of the exchangeable value of 
labor, to which, although it is involved in w^hat I have 
said, it would perhaps have been better to have pointed 
more distinctly earlier in the argument. The exchange- 
able value of any article, however much it may vary, 
can never exceed its supposed utility ; but productive 
labor has absolutely no utility of itself, it is never worth 
more than it will produce ; consequently its value can 
never rise above the value or supposed value of what 
it can produce, less a satisfactory profit to its employer. 
In proportion as its value is less than this, will capitalists 
seek to employ it, and the sum of production be the 
greater and the total wages-fund increased. When any 
material commodity, on account of its scarcity, increases 
in value, the total amount of it in existence may exchange 
for a greater, the same, or a less amount of other things 
than before. When the cost of labor is enhanced on ac- 
count of its scarcity, as compared with the sum total of 
existent material products, the total amount exchanged 
(i. e., employed) will only obtain a smaller sum total than 



258 CAPITAL AND POPULATION. 

before, because what is not employed, as it can not be re- 
served, is lost to its possessors for ever. 

The price of labor is affected by another peculiarity. 
During any period of rise or of fall in general prices, labor 
is among the last of the commodities to be affected. Its 
rise or fall follows that of the material commodities it 
produces only after a considerable interval. It conse- 
quently happens that any period of advancing prices is 
also a period of great industrial activity, and a period of 
declining prices one of industrial stagnation. An ephem- 
eral rise is, to be sure, of only transient advantage, and, 
as I have elsewhere shown, meveih^i compensated for by 
the results of the ensuing decline — i. e., the sum total of 
the production of both periods is less than if prices had 
remained uniform at their normal figure. But when the 
advance in prices is maintained, the advantage gained by 
it, and the accumulation it justifies, are retained. This 
explains wliy the industrial development of the civilized 
world, which we are yet enjoying, was coincident in its 
commencement with the discovery of the mines of Mex- 
ico and Peru. And that this development has been sus- 
tained to the present time by the discovery and exploita- 
tion of the mines of the United States, Australia, and 
Siberia, history does not allow us to doubt, although 
other powerful causes, such as the advance in science and 
the arts, greater freedom of individual and social action, 
and the greater abundance and availability of fertile land, 
have contributed to the result. 

The increase of material wealth and in the activity of 
exchanges, as well as the growth of population, act as a 
drag upon the gradual and permanent rise in general 
prices to which they largely owe their being. Yast as 
has been the increase of the world's circulating medium, 



SOME OTHER EFFECTS OF THE LAW. 259 

and greatly as its efficiency lias been increased by the de- 
velopment of the credit system, the activity of exchanges 
has increased in nearly equal proportion. 

When the system of co-operation is fully organized 
and established it will not be so, but as long as produc- 
tion is carried on, on the basis of the wages system, a 
gradual and permanent decline in prices must entail a 
gradual and permanent decline in production, or at least 
greatly retard its increase. Such a period must be one 
in which the average rate of profit is smaller, and the em- 
ployment of labor less, than when the general tendency 
of prices is to advance. Under co-operation, the induce- 
ment to produce will not so much be profit, as the desire 
to utilize labor ; but, while employer and employe are dis- 
tinct persons, the amount of production must wholly de- 
pend on the rate of profit, and anything that lowers that 
rate, as a gradual and permanent decline in prices would 
do, can not but depress industry. 

The demonetization of silver, if it becomes general, 
will undoubtedly depress prices to somewhere about the ; 
point they reached in the middle ages, and will entail an .; 
incalculable but enormous decline in the material pros- j 
perity of the world. The adoption of that policy by ) 
England, Germany, and the United States was mainly 
responsible for the severity and long continuance of our 
last period of depression, and, if it is continued by these 
nations and adopted by others, we may expect our peri- 
ods of industrial activity to be shorter and less gainful, 
and our periods of depression to be longer and more se- 
vere, than they have heretofore been ; and to such degree 
will this result as, in all probability, to place the world 
in the retrogressive state in which the total production 
will annually decline. 



260 CAPITAL AND POPULATIOK 

Any increase of the medium of exchange, founded on 
the solid basis of an increase of the precious metals, or on 
that of a legitimate and safe extension of credit, yields 
benefits analogous to those derived from an inflation of 
the currency, without the drawback of the ensuing con- 
traction, that must occur when it is founded on an un- 
substantial basis, or confined to the limited area of a 
single nation. Advancing civilization demands not only 
an equivalent but a somewhat greater increase in the 
medium of exchange, and can not proceed w^ithout it, as 
long as labor continues to be a commodity. 

The above observations on prices and the medium of 
circulation serve to explain the anxiety with which com- 
mercial men watch the rate of international exchange and 
the importation or exportation of gold. It is not because 
they are yet infected with the exploded fallacies of the 
mercantile system, but because experience has taught 
them that the increase of the circulating medium means 
a period of higher prices, greater profits, and increased 
industry, and that the exportation of gold is a warning to 
prepare for lower prices, declining profits, and industrial 
stagnation. 

Further instances could be multiplied where theories 
are modified and facts explained by the recognition of 
the law I have attempted to enunciate and elucidate — 
the ramifications of the subject are endless and lead in 
every direction. As the purpose of this work is rather 
to substantiate than to apply the main principle involved, 
enough has been said on these points, except to call at- 
tention to the fact that the law, which I have endeavored 
to explain, affects social questions as powerfully as it 
does economic. These have, to some extent, been con- 
sidered, but only when they were involved in the eco- 



SOME OTHER EFFECTS OF THE LAW. 261 

nomic qnestions under review. Considering them as 
beyond the strict domains of our science, and as belong- 
ing to a higher one, it would have been ont of place to 
attempt to consider them in their full bearings, and I 
only mention them here, that it may not be supposed 
I am oblivious of their relation to the subject. 



CHAPTEE XYIII. 



CONCLUSION. 



Although it will involve some repetition, a gathering 
together of the principal results obtained into a conden- 
sation of my argument will not be out of place. 

We have first found an important variation in the 
definitions of capital, as given hy Eicardo and Mill, and 
have seen that that of the former is defective ; and that, 
while Mill has rectified the definition of Eicardo, he has 
adopted the latter's deductions, without perceiving that 
they were only applicable to capital in the limited sense 
in w^hich Eicardo used the term. We have then made 
the deduction that over-accumulation — meaning by that 
term an increase of capital beyond the needs of popula-. 
tion — is not only possible, as Mill and Eicardo both ac- 
knowledge, but of frequent and periodic occurrence in 
all civilized nations, and that it is so was proved by the 
irrefutable test of the rate of profit during times of de- 
pression, and the periodic occurrence of such times — 
the low rate that always obtains in such periods being a 
certain indication that capital is then superabundant. 

We then noticed that the distinction between dead 
and active stock, although perceived and acknowledged 
by both economists, was practically ignored in their argu- 
ments. 

We also noticed that the over-accumulation which is 



CONCLUSION". 263 

here contended for does not at all conflict with the re- 
sults obtained by Say from a consideration of the laws of 
supply and demand, but, on the contrary, is in full ac- 
cordance with them, labor being considered as a commod- 
ity. We also detected Mill in an erroneous use of the 
word " market," and found that the word really refers, 
not to the possibility of exchanging at any price, but only 
to the possibility of goods exchanging for the value of 
the labor that will reproduce them with some profit, and 
that a market is good or bad in proportion as such profit 
is great or small. 

We also ascertained that the adjustment of the ratio 
of capital to population, when producers are influenced 
in their production by the hope of gain, could only prac- 
tically be obtained by a sufiicient cessation from further 
production, and that the consequent lack of employment 
overbalanced to the laborers the accompanying rise in 
their rate of proportional wages. 

In the further pursuit of the argument we were able 
to rightly discriminate between proportional and real 
wages, and to show that they varied inversely instead of 
together, as has heretofore been assumed. This, again, 
led us to valuable conclusions on the labor question, so- 
cialism, and co-operation, and enabled us to make the im- 
portant deduction that a high rate of proportional wages 
is not, as Mill and Ricardo everywhere assume, a stimulus 
to population, but the reverse — the real stimulus being 
the rate of real wages, that varies inversely with it. And 
this deduction threw some further light upon the labor 
question, and showed that the efforts of the laborers, 
through their present organizationSj to raise money and 
proportional but not real wages, are very prejudicial to 

their own interests, 
12 



264 CAPITAL AND POPULATIOIiT. 

We were then enabled to arrive at a complete and 
satisfactory explanation of commercial crises and the in- 
dustrial stagnation which invariably follows them, a hith- 
erto misolved problem of the science. We were also 
enabled, as never before, to understand the economic nat- 
ure and action of credit, and to correct several miscon- 
ceptions on the subject. 

Having established the fact that capital in civilized 
countries constantly tends to an over-increase, it of course 
followed that a country would very soon obtain any ad- 
ditional capital demanded by an increase in its popula- 
tion or by a change in the nature of its industries, and 
that such increase would be the fruit of labor that would 
otherwise have been wasted in idleness. This enabled 
us to undermine the fundamental premise of free trade, 
in so far as the distribution of wealth is concerned. We 
saw that the gain or loss to an individual nation of im- 
porting foreign goods was not to be computed from a 
comparison of the price at which a commodity could be 
imported with the price at which it could be made at 
home, but from a comparison of its imported cost with 
the cost alone of the labor which would be diverted to 
its manufacture. We further showed that what caused 
nations to manufacture instead of to cultivate the soil 
was, to but a slight degree, any advantage possessed over 
their neighbors in manufacturing itself, but was mainly 
the lowness of their own margin of cultivation. A fur- 
ther consideration of the inherent nature of agriculture 
and "manufacture showed the latter to possess great eco- 
nomic advantages over the former as a national pursuit, 
and to such degree that, as a matter of fact, some coun- 
tries, with the least natural facilities for production, had 
greatly the advantage over their more favored neighbors 



CONCLUSION". 265 

in the amount of their capitalized wealth, and were able 
to equal them in the value ])er capita of their annual 
product, notwithstanding a great difference in the re- 
spective efficiency of their labor ; and we saw that this 
unnatural result was accomplished through the profits, 
that nations with a high margin of cultivation could ap- 
propriate to themselves, through a protective policy alone, 
and that the gain of such policy, if wisely pursued, 
would overbalance any loss in the efficiency of labor 
that resulted from its being diverted from agriculture. 

A consideration of the equation of international de- 
mand, based entirely upon Mill's premises, and with 
some trivial exceptions upon his deductions, also showed 
us that the equation, in the nature of things, when com- 
merce is unrestricted, must be against an agricultural 
country ; and led us to the new and important principle 
that the gain of the manufacturing country will not ex- 
press itself in its rate of manufacturing profit, but in the 
amount of its dead stock and the gross amount of its 
profits thereon. This heretofore unobserved circum- 
stance enabled us to appreciate as never before the prac- 
tical working of the equation itself, and explained the 
fact that manufacturing are the lending nations of the 
world. We- then considered the distribution of wealth 
in a protected country, and found that, though not as 
beneficial to its laboring classes as could be wished, it yet 
worked somewhat to their advantage, especially when the 
policy was first adopted. We ascertained, in the course 
of our argument, that a manufacturing country can not 
protect itself against an agricultural, and only injures 
itself by the attempt, and that the policy of " fair trade," 
coming into favor in England, is illusory in its promises. 
We also discovered that the nations now benefited by 



266 CAPITAL AND POPULATION. 

free trade will, in- the near future, be forced into com- 
petition with nations of a yet lower margin of cultivation, 
and, when this happens, that their industry can only be 
preserved, and that but partially, by they themselves 
adopting the policy they now denounce. 

A discussion of rent elucidated the fact that there is 
an hitherto unnoticed difference in the effect upon prices 
of that portion of it due to inherent fertility and that due 
to propinquity to market, and that the latter does affect 
the comparative value and price of manufactured goods, 
and is at the expense of the consumer of such goods 
wherever consumed, and that, when such consumer is a 
foreigner, such portion of rental is a tribute laid by one 
country upon another. 

A consideration of commerce, hitherto left out of the 
discussion, showed it to possess advantages as a national 
pursuit superior even to manufactures, but that it could 
only be protected in the form of subsidies granted to it, 
and we obtained suggestions as to our own national policy 
of the greatest value. 

Finally, we found that the admitted loss to the world, 
in the efficiency of its labor caused by protection, was 
only the price that must be paid for a better final distri- 
bution of its labor and capital ; and, although we were un- 
able to determine whether the result was fully worth the 
price, we did find several indications that it was suffi- 
ciently so to remove the moral stigma of national selfish- 
ness from those nations who adopt the policy. 

Lastly, our principle threw greatly needed light on 
the subjects of taxation and national indebtedness, and 
afforded a basis for a positive decision in favor of bi- 
metallism. 

Affecting all these questions as it does, the importance 



CONCLUSION. 267 

of the principle that, in countries where law and order 
prevail, the tendency of capital is to outstrip population, 
can hardly be overestimated. It effects as great a revolu- 
tion in economic ideas as any single principle ever enun- 
ciated. Whether I have established it as a leading prin- 
ciple of the science must be left to the reader to judge. 
It certainly seems to me to be in accordance with every 
fact of history and experience, to throw light on many 
intricate subjects not hitherto understood^ and to have a 
practical bearing in the application of the science, that will 
remove from it the stigma of consisting mainly of inap- 
plicable theories — an objection hitherto too well founded 
on fact. And, lastly, I can not but feel it to be in the 
line of and in full accord with all well-established eco- 
nomic laws, and, however inconsistent with their final 
conclusions, purely the logical result of the thoughts and 
teachings of the three great masters of political economy, 
Smith, Hicardo, and Mill ; for which reasons I venture to 
hope for this treatise a more kindly reception than the- 
ories of over-accumulation have heretofore received. 



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complete glossary of those terms ; and he has done this so well, both in his choice 
of terms for definition and in his clear exposition of their etymological and tech- 
nical meaning, as to leave nothing to be desired in this direction." — New York 
Evening Post. 

For sale by all booksellers, or any work sent by mail, post-paid, on receipt of price. 

D. APPLETON & CO., Publishers, 

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Scientific Publications. 



GENERAIL PHYSIOILOGY OF MUSCI.ES AND NERVES. By Dr I 

Rosenthal, Professor of Physiology at the University of Erlangen With 
seventy-five Woodcuts. (" International Scientific Series.") 12mo, cloth, 

JJpl.OfJ* 

"The attempt at a connected account of the general physioloffv o' muscles 
and nerves is, as far as I know, the first of its kind. The generaf data Tor th!s 
from%1facr'' ^'^' ^^^^g-i^^d only within the past tM?tTrears^''-Sac1 

SIGHT : An Exposition of the Principles of Monocular and Binocular Vision 
By Joseph Le Conte, LL.D., author of "Elements of Geoloc^y"- "Re- 
ligion and Science " ; and Professor of Geology and Natural His'tory in the 
University of California. With numerous Illustrations. 12mo, cloth, $1 50 

Tr^:S^i^r,P%Tj::tSt ^^^-^--^^ -^ ^^-^ he gives is is treSeT^iS 

ANIMAIL MFE, as afi-ected by the Natural Conditions of Existence. By 
Karl Semper, Professor of the University of Wiirzburg. With 2 Maps 
and 106 Woodcuts, and Index. 12mo, cloth, $2.00. 

, '"^!^l^,is, ^°.»iany respects one of the most interesting contributions to 
zoological literature which has appeared for some time. '^-A^aiure 

THE ATOMIC THEORY. By Ab. Wurtz, Membra de I'Institut ; Doyen 
Honoraire de la Faculte de Medecine ; Professeur a la Faculte des Sciences 
deParis. Translated by E. Cleminshaw, M. A., F.C.S.,F. I C Assist 
ant Master at Sherborne School. 12mo, cloth, $1.50. 

in its^hfsTodf evob^Hn!;.^«nH°^ ^>'^ *^^'' "iH^^ <3iscusses the atomic theory both 
in lis tiistoric evolution and m its present form. And nerhao'i no man of this 

Tnd sciSid?? \ntJrP^^ nV'p"^/'^^^^^^^^ '^^? ^/the scope, lucid instructiveness, 
«^^rv,^f! ^- ?*^^^^* ^^ Professor Wurtz's book. The modern oroblems of 
chemistry, which are commonly so obscure from imperfect expos?tiSi are he?e 
made wonderfully clear and attractive."-7:^e FopulSr Scien!?Monthly: 

THE CRAYFISH. An Introduction to the Study of Zoology. By Professor 

T. H. HuxLET, F. R. S. With 82 Illustrations. 12mo, cloth, $1.75. 
hini'sS^fh^cL^"' follow these pages, crayfish in hand, and will try to verifv for 
San ?he i?elf ^n«L^?.«f they contain, will find himself brought fa Je to fice 
present day." zoological questions which excite so lively an interest at the 

wond'^rytZ^fml,n^''J?^f-H™a''°^?P^^"' ^^^ '^ down with a feeling of 
Sv !h^L o,,^ ^°'^.^°i^^"^*y of matter which has been got out of so seem- 
ingly slight and unpretending a sahiecty-Saturday Review. 

D. APPLETON & CO., Publishers, 

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Scientific Publications. 



THE HUMAN SPECIES. By A. De Quatrefages, Professor of Anthro- 
pology in the Museum of Natural History, Paris. 12mo, cloth, $2.00. 

The work treats of the unity, origin, antiquity, and original localization of 
the human species, peopling of the globe, acclimatization, primitive man, forma- 
tion of the human races, fossil human races, present human races, and the physi- 
cal and psychological characters of mankind. 

STUDENTS' TEXT-BOOK OF COI.OR ; or, MODERN CHROMAT- 
ICS. With Applications to Art and Industry. With 130 Original Illus- 
trations, and Frontispiece in Colors. By Ogden N, Rood, Professor of 
Physics in Columbia College. 12mo, cloth, $2.00. 

" In this interesting book Professor Rood, who, as a distinguished Professor 
of Physics in Columbia College, United States, must be accepted as a competent 
authority on the branch of science of which he treats, deals briefly and succinctly 
with what may be termed the scientific rationale of his subject. But the chief 
value of his work is to be attributed to the fact that he is himself an accom- 
plished artist as well as an authoritative expounder of science.''''— Edinburgh 
Review, October, 1879, in an article on " The Philosophy of Color.'''' 

EDUCATION AS A SCIENCE. By Alexander Bain, LL. D. 12mo, cloth, 

$1.75. 

" This work must be pronounced the most remarkable discussion of educa- 
tional problems which has been published in our day. We do not hesitate to 
bespeak for it the widest circulation and the most earnest attention. It should 
be in the hands of every school-teacher and friend of education throughout the 
land."— iV^(5w York Sun. 

A HISTORY OF THE GROWTH OF THE STEAM-ENGINE. By 

Robert H. Thurston, A. M., C. E., Professor of Mechanical Engineering 
in the Stevens Institute of Technology, Hoboken, N. J., etc. With 163 
Illustrations, including 15 Portraits. 12mo, cloth, $2.50. 

" Professor Thurston almost exhausts his subject ; details of mechanism are 
/ollowed by interesting biographies of the more important inventors. If, as is 
contended, the steam-engine is the most important physical agent in civilizing 
the world, its history is a desideratum, and the readers of the present work will 
agree that it could have a no more amusing and intelligent historian than our 
author."— 5<?5to«. Gazette. 

STUDIES IN SPECTRUM ANAIiYSIS. By J. Norman Lockter, F. R. S., 
Correspondent of the Institute of France, etc. With 60 Illustrations. 12mo, 
cloth, $2.50. 

" The study of spectrum analysis is one fraught with a peculiar fascination, 
and some of the author's experiments are exceedingly picturesque in their re- 
sults. They are so lucidly described, too, that the reader keeps on, from page 
to page, never flagging in interest in the matter before him, nor putting down 
the book until the last page is reached."— iVew York Evening Express. 

D. APPLETON & CO., Publishers, 

1, 3, & 5 Bond Street, New York. 



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